(Solved): Health care economics and policy : The Cobweb Model Part 1 The Cobweb Model This economic mode ...

Health care economics and policy : The Cobweb Model

Part 1

The Cobweb Model

This economic model was developed to explain the observation which is often seen in agriculture wherein the market clearing price of a commodity like corn is determined this year by how much corn was grown this year.  The amount of corn which farmers plant to be harvested next year, is determined by the price of corn this year.  This inter-temporal relationship between supply and demand can lead to annual oscillations between shortage and surplus; price spikes, and price collapse as illustrated in the image to the right.

Incidentally, in 2020 the number of acres of winter wheat planted in the US was the lowest since 1911!  In 2021, the number of acres planted in winter wheat will probably set an all-time record.

Although this model is normally used to explain the boom and bust of agriculture, it also applies to the production of health care workers by the health care education system.  The oversupply and undersupply of physicians, nurses, pharmacists, and technicians in various specialties goes through similar boom and bust cycles.  This may be an inevitable consequence of the lead time needed to educate (produce) these workers, but some of the phenomenon may also be due to price setting by regulatory bodies. This homework will illustrate the cobweb model mechanism as it applies to a fictional healthcare profession.

Role Playing Situation

Read the role playing scenario in the textbook in section 6.6.1 where a fictitious specialty:  Lymphography  has its price regulated by CMS.  Although the specialty is fictitious, the regulation is very realistic and explains why so much posturing, effort, and regulatory capture goes into the process.  Work through the math as it is explained in that section of the book and try to match the prices and quantities derived there for P₂, Q₂, P₃, Q₃, and Q₄.

What will P4 be?     _________

Will there be a surplus or shortage in year 4?  _____________________

Part 2 Graduate Students Only

Using the following supply and demand equations, repeat the steps above and populate the table below. Remember the quantity supplied in year( t )is based on the price set in year (t-1), so your first calculation is for Q₂. (the quantity supplied in year 2)

Supply:   Q_t = (-75/2) + (5/4)*P_t-1                       (equation S)

Demand:   P_t = 2800 – (1/2)*Q_t                          (equation D)

1. Describe what went differently in this second model.  How might this inform regulators attempting to set prices in markets where the Cobweb behavior occurs.

2. What other regulatory policies or strategies might work to dampen some of the fluctuation seen in Cobweb markets?  See what solutions have been used historically in agriculture.