Health Economics: Organ Shortage, Demand, and Grossman Model Analysis

This report delves into health economics, addressing the critical issue of organ shortages. It examines the reasons behind these shortages, including ethical considerations and incentive problems, and analyzes how a free market for organs might affect supply and demand dynamics, even in cases where demand defies the law of demand. The report further explores the ethical implications of such a market, considering its impact on different socioeconomic groups. Additionally, the assignment applies the Grossman model to understand how hypochondriasis affects an individual's optimal health level, considering health as capital, consumption good, and input into production. It also assesses how an exogenous income shock, such as winning a lottery, might alter the health decisions of a hypochondriac, considering the potential impact on medication choices, productivity, and overall well-being. The report provides diagrams to facilitate explanations of the concepts discussed.

Running Head: Health Economics
Health Economics
Application and Policy

Health Economics 1
Question 1
a) (i) Why do you think these shortages exist?
Dialysis is very expensive and provides a lower life expectancy as well as life quality than
organ transplant. With the increase in cases of kidney and liver failures due to the lifestyle
of the people, the demand for organs increased back then (Ahmed & Iftikhar, 2016). The
demand had been increasing constantly while the supply is did not respond much. Even
when there was a huge scope for kidney donation, since each person has two kidneys and it
is absolutely adequate to survive with one, there was shortage. Factors responsible for the
shortage included ethical complications. People were reluctant to donate even in the case
of cadaveric donation. Even if there was consent given by the dead, the relatives were
reluctant (Ghorbani, Khoddami, Ghobadi, & Zadeh, 2011). On the other hand, there was
incentive problem for the donors. Since the selling of organs was illegal, there was a very
low compensation provided to the donors. They did not have an incentive to undergo a
surgery and the opportunity cost associated with it was high. Also, there was lack of
awareness among the people and myths which prohibited them from taking part in the
noble cause.
(ii) Suppose quantity demanded of organs (e.g. kidney) goes up with price. Can you think
of a reason why demand for organs would defy the Law of demand? If organ was
available in a free market, how would the shortage be reflected in a supply-demand
framework, where demand for an organ is upward sloping? Explain using an appropriately
labeled diagram.
As per the law of demand, ceteris paribus, demand for organs will decrease with the
increase in the price. For the given case, plausible reasons could be the lifestyle of the
people. Unhealthy lifestyle leads to greater kidney and liver failure. When the alcohol

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consumption of the people increases, the chances of liver and kidney failure increase. Same
is the case with smoking (Ishii, Horie, Yamagishi, & Ebinuma, 2010). When the cigarette
consumption of the consumer increases, so does the probability of organ failure. All this
leads to increase in the demand of the organ transplant even when the price constantly
rises. The supply does not respond to the ever increasing demand and is pretty much
constant.
Free market solves the problem of incentive (Block & Butt, 2011). Free market lets the
market forces determine the price for organ. In the given figure, initially the supply is low
while the demand curve is high. The initial quantity was Q and price the price is fixed low at
P. There is a demand gap. But in case of free market and when the demand curve is
assumed to be upwards sloping, the equilibrium is attained with the interaction of market
forces. It is achieved at E. The equilibrium price P’ and equilibrium quantity Q’. Both price
and quantity have increased. With the increase in prices, people will have an incentive to
donate (Leidera & Roth, 2010). Suppliers will be attracted towards the market and the
shortage will be reduced. Higher price in the market on the other hand will also induce the
people to improve their lifestyle and avoid the organ failure since it is expensive to have an
organ transplant.

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Figure 1: Free market with upwards sloping demand curve
(iii) Continuing with this hypothetical case (of a market for organs), do you expect the
market demand curve for organs to be price elastic or price inelastic? What about the
supply curves? Explain why.
Demand curve in the hypothetical case will be inelastic. This is because people require
kidney transplants to survive and increased price will not affect the quantity much. People
will require organs irrespective of the price rise. On the other hand, supply will be highly
elastic. This is because initially there was an incentive problem. Now with the increased
prices, more donors will be attracted and will enter the market and vice versa. This will
eventually increase the supply in the market.
b) “We should allow a market for human organs where purchase and sale of organs for
transplant surgery can be conducted just like any other economic goods.” Do you agree or

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disagree? Justify your stance from an ethical point of view or an efficiency point of view.
In case of free market, the market forces determine the equilibrium prices and the organ
quantities. The prices will tend to increase and eventually the supply also. On one hand,
more people will have access to donated organs but this will pose a problem for the lower
sections who could not afford the transplant (Bilgel, 2011). A larger section of the society
will now not be able to afford the treatment. This section will increase with the increase in
prices and the people who are poor will suffer the most (Ambagtsheer, 2017). Post
donation, the person need to rest and take proper treatments all with regular checkups.
This will be expensive for the poor in terms monetary loss as well as the opportunity cost. It
is difficult for them to opt for dialysis in the long run and hence will die because of lack of
treatment. Free market for organ transplant will be wrong on the ethical view point.
On the other hand, this will lead to misuse of poor people who will be influenced or even
forced to donate without proper knowledge and testing (Frederick, 2010). They will not be
able to afford the after donation treatment and will not be able to work for the couple of
weeks. They will be fooled and paid less. Poor laborers will be fooled by doctors and their
organs will be taken without their consent. Poor people are also under nourished. Their
survival rate will be lower than a healthy person. The recovery rate will also be lower
comparatively. This might lead to wastage as well as wrong transplant in people.
Moreover, people will be demotivated to lead a healthier life. As the supply increases
people will consider organs to be accessible. People might increase their consumption of
alcohol, cigarettes, tobacco and others. On the contrary when the supply was low, people
might be conscious and motivated towards a healthy lifestyle.
Question2

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Imagine an individual in the Grossman model who suddenly develops hypochondriasis.
a) How would this affect her optimal level of health? Explain your answer in the light of
the three roles that health plays in the model. Use appropriate diagrams to facilitate your
explanation.
Having concern about one’s health is absolutely normal while self-diagnosis and
compulsively exaggerating a small change or symptoms for something big is not. This affects
the mental health of the person. He is compelled to look out for bigger health issues. People
often resort to internet to look for symptoms but internet is that it does not provide the
medical knowledge that a doctor acquires over the years through his study and practice
(Brain, 2011). Online information can often be misleading and dangerous. People tend to get
‘paralysed by denial’ and do not go for a follow to a doctor. This can lead to unnecessary
anxiety and depression and self-made decisions regarding one’s health (Taylor &
Asmundson, 2012). The mental health even reduces the physical capacity of the
Hypochondriac.
Hypochondriac person uses his time to evaluate his physical well-being at the expense of his
emotional and mental well- being. Health plays three important roles in the model of
Grossman which include:
 Capital stock form: In case of hypochondriac, the person self-diagnoses his health
and takes actions which he finds suitable. Often these people do not consult the
doctors and depreciate their health by not taking proper treatments. Health is
considered to be a durable capital stock (Zweife, 2012). It leads to the production of
healthy time and lifestyle. A person is born with an inherited level of health. It
depreciates with the span of time and age (A Revisit to the Grossman Model with
Endogenous Health Depreciation, 2016). Also, it diminishes due to lack of exercise

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and unhealthy habits.
 Consumption good: Hypochondria affects the pleasure that people derive from being
healthy. They focus excessively on health and worry over petty things, which reduce
their present state of well-being and affect the mental as well as physical health.
Health enters the utility function as consumption commodity (Galamaa & Kapteyn,
2011). It is demanded as a commodity of consumption. It includes the satisfaction
and pleasure that people derive from being healthy.
 Input into the process of production: Hypochondriacs affect the long term health of
the person. He compromises his present health based on his self-diagnose and do
not take the required treatment which might affect him adversely. Health enters the
as a commodity of investment (Jones, Laporte, Rice, & Zucchelli, 2014). Health plays
an important role in the production. If the person is unhealthy, he may not be work
to his fullest capacity. Total time availability for market and non-market activities.
 Of the productive time: Hypochondriac wastes his energy and time on
analysing his health instead of being productive. There is opportunity cost
associated with this hypochondria disorder. He spends his time looking for
symptoms and disorder and thus, reducing his productivity. A person can
instead invest his time in market and non- market activities. He can have
more healthy life for productive uses. The total time available to him and the
productive activities he chooses to spend it on.
 Of the health: Person can spend his time on improving his health by eating
healthy, adopting good dietary habits and exercising. On the other hand,

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hypochondriac might worry too much and instead of improving his heath, he
deteriorates it. He destroys his potential, creativity and happiness. They
develop and trigger the problems and anxiety.
Figure 2: Grossman Model
(Source: Strulik, 2015)

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Figure 3: Health as an investment good
Source: https://youtu.be/aOl_dnsMFfY
Figure 4: Using health capital to produce productive time
Source: https://youtu.be/aOl_dnsMFfY

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b) Now imagine this hypochondriac suddenly wins a mega jackpot lottery of $1 million.
How does this exogenous income shock change decisions about her health status?
Hypochondriac are the people who get unduly alarmed about their physical and
psychological symptoms that they discover. They are preoccupied by their body functions
and interpretations of the basic body sensations. These could be sweating and other
abnormalities of minor level like body aches, cramps and other minor pains (Guo, Wang,
Meng, & Wang, 2015). They often convince themselves that the minor illness that they have
for some big and serious disorder. They often refuse to see the doctor and analyse on his
personal level. Consulting a doctor in some cases only aggravates their level of anxiety.
When he wins a mega jackpot, his approach towards medications and other things increase.
He now focusses more on his health and illness. He also substitutes his work time for his
obsessive health concerns. His overall productivity will reduce and the mental health will
eventually deteriorate more with the span of time.
Certain medicines which were not accessible because they required doctor’s prescription
might be within his reach now. He will spend more on medicines in the hope for better
health and well-being. He will opt for expensive medicines and drugs. These might have
major side effects. Eventually, he will get accustomed to the expensive medicines which
might not be feasible in the long run. He might try different products which will hamper his
immune system. He might enter the black market to access the products. He might engage
in illegal activities just to have access to certain medicines and products.
There are chances that he will get addicted to certain medicines and drugs which he thinks
are doing him good. This will have adverse effects on his health. Drugs have side effects and

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will worsen his case. His potential to work will fall drastically and the he will indulge more
into this. He will prefer not to work. He will end up consuming the whole jackpot money and
with deteriorated his health. He will be used to the high quality and expensive commodities
will be difficult to maintain in the future. All this will affect his lifestyle and getting back to
the normal phase will be extremely difficult for them.
Excess consumption of medicines on his part has a major impact on the immune system of
the person. He has a tendency to take medicines time and again. This creates a problem
when the drug stops working on that person because his body gets used to it. Unnecessary
drugs intake leads to other body disorders. Often these people provide their assistance to
other people and mislead them. Intake of medicines which are not prescribed by a
professional doctor might result in allergies and other dysfunctions in the body.
After the jackpot he might experiment different products and services. The side effects of
these medicines will lead to consumption of other medicines. The new ones will either
worsen the situation or have more side effects. Eventually there will be a chain effect.
Medicines and salts might stop working. The end result will be deterioration of health and
wastage of time, money and energy.
Since he can afford high-end expensive medicines, he will rely greatly on them with the
sudden increase in his income. The hypochondriac will cut down on his nutritional intake
from natural foods and consume more of other medicines and drugs which he can now
afford. The lower intake of nutrients will affect his health adversely. Now, to cover up for
the deficiency of nutrients, he will rely on supplements and other medicines. He will lose his
glow and health along with the mental peace. Deficiency of nutrients often makes people
agitated and irritated. He might end up in depression due to his body disorders or the

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anxiety. He might further worsen the situation by taking anti-depressants and drugs for
other psychological problems.
Question3
a) Is there any scientific evidence to validate this claim (cite at least two authentic journal
articles).
Over the years, people have developed a myth which relates the human health and
behavior to the lunar eclipse. People often get agitated and Humans are believed to
develop the tendency to commit suicides and many other acts of violence. Lunar eclipse is
assumed to be linked with episodes of psychiatrics and admissions in the emergency
departments at the hospitals by both professionals and general public. There is increase in
the homicides, suicides, increased admissions and emergency department visits. This myth
has existed since the middle ages that the severity of sickness increases at the time of full
moon. Major bulk of researches done in the above relationship, show no correlation
between the two (Parmar, et al., 2014). People modified their treatments and
appointments based on the lunar cycles. There was no link found between the medical
emergencies, mortality, morbidity and survival rate with the lunar cycles as per the research
on 278 patients between the years 1994-2009 (Kleespies, et al., 2017).
b) If the claim is valid, explain why there might be a higher incidence of suicide on full
moon. If not, what behavioral bias is responsible for such views? Explain. 160 words
Despite the researches made on the given myth (Margot, 2015), there are people who still
believe it. Fueling to these people’s beliefs are the researchers who conform to such beliefs
and develop their own theories for the same. This could be because of the delayed
discounting bias (Bridge, et al., 2015). There is confirmation bias involved here because of

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which people relate instances to the myths. Any form of evidence makes them increase
their beliefs in the myth. There are people who relate the myth to the salvation and commit
suicides because of their beliefs. People might also have illusionary correlations which
makes them build up their own illusions based on casual-effect relationships. They do not
adapt to the improvements and researches done on the myth and continue with their
beliefs. People are often reluctant to change to as per the circumstances. They have firm
beliefs and foundation which is difficult for research to change.
c) Briefly discuss another example in healthcare where such bias may be present.
This bias can also be applied to the patients who choose to take an appointment with a
nearby doctor or physician rather than a specialist who practices far-off. This saves the
consumer the time and travel in the present but may be risky in the long-run. He will have to
consult the specialist later anyway. Another example of such bias can be at the time of
appointment with the doctor. Doctors ask a few basis questions and prescribe the tests,
treatments and medications based on them. They do not further interrogate the patients.
This is often done to reduce the time allocated to per person, which is the short term
benefit to the doctor. This can be really dangerous in the long-run in terms of the health of
the patient.
d) What role does “present-bias” play in patients’ health-related (e.g. lifestyle) choices?
Provide an example.
Present bias people assign greater pay-offs to the current benefit than the future or long-
run benefit (Behavioral Science Solutions, 2018). There is a trade-off involved between the
two in the favour of present. A person’s lifestyle affects his likelihood to fall sick and develop
chronic diseases like heart disease and diabetes. People indulge in unhealthy fast foods and
beverages which not only increase their chances of getting sick but also make them obese.

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Alcohol is another factor contributing to unhealthy lifestyles (Hu & Stowe, 2013). These
people are often found procrastinating on the physical activities which is another big
influencer of healthy lifestyle. They look for present satisfaction associated with unhealthy
foods and overlook on the long-term problems that they pose (Rao, 2014). Some people try
to adapt a healthy living but they sooner or later deviate from the thought. They find
excuses to live in the current state of unhealthy lifestyle.
A large number of health issues are associated with the lifestyles of people. If the disparities
in the exercising can be reduced, people will be able to prevent many diseases and gain
from the other benefits of exercising. Obesity can also be fought with by indulging in some
form of physical activity.
Present bias can also be noted at the time when vaccination was not compulsory. People
used to procrastinate on getting their children vaccinated. This often led to high hospital
bills later on which people were more comfortable in doing. This behaviour was changed by
the legislative body when the vaccination was made compulsory and helped in present bias
correction.
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