Knowledge that Transforms

One of the enduring and truly perplexing issues in American legal theory is the question of how and to what degree the values associated with are embodied in the United States Constitution. Recent controversies, both in law and in economics, on the efficiency of the public sector in regulation and in the provision of public goods, on the virtues or perils of privatization, and on public choice and the legal process proceed too often without reference to the American system's constitutional heritage. The assumptions often manifest in neoconservative analysis, particularly the view that economic liberty

The economic reform under way in the USSR is part of a general process of perestroika (restructuring), encompassing all spheres of social life. Consequently, the reform measures discussed below should be understood and analyzed in the wider context of that general process. Nevertheless, I will only be able to focus here on those parts of perestroika directly concerning the economy. Our reform strategy can be divided into three phases. Phase I (1985-87) has focused on the understanding of the past and the development of a strategy. Phase II (1988-90) will be a transitional phase during which the new system will be introduced, while many features of the old system will linger. Phase III (1991-95) will be the first full five-year plan period in which the entire system will be in place and functioning.

There are qualifications to the theoretical comparison between Health Maintenance Organizations (HMOs) and conventional insurance (CI), presented in a recent contribution to this Review by Yael Benjamini and Yaov Benjamini (1986). These qualifications make difficult the acceptance, as an unambiguous prediction of economic theory, the authors' conclusions regarding the relative attractiveness of the two methods of insurance to groups of individuals with heterogeneous demands. The authors' arguments are summarized as follows. For homogeneous insureds, an HMO can resemble ideal medical insurance depending on the extent to which the prearranged medical care provided in each health state approximates the desired level for the homogeneous group. Under such conditions, an HMO would be superior to a CI plan in that it is free of the moral that causes a welfare loss under the latter. However, if insureds are heterogeneous in terms of tastes, or any other factor that affects... a welfare loss will also result under the HMO. Because the quantity of medical care provided for a given health state is fixed for an HMO, it cannot satisfy the divergent medical care demands of all insureds in a heterogeneous group. In contrast, the greater flexibility afforded by CI enables insureds with divergent demands to more closely achieve their desired levels of medical care consumption. The welfare loss due to moral hazard is assumed to be little affected by divergent demands, and no other potential effects of demand heterogeneity on the desirability of CI are mentioned. The implication of the authors' analysis is that greater heterogeneity among insureds generally increases preferences for a CI plan over an HMO.' The analysis presented by Benjamini and Benjamini (1986) contains two omissions that pertain to the effect of heterogeneous demand on the desirability of a CI plan. First, heterogeneous demand causes cross-subsidization under a CI plan over and above that due to the incidence of health state. Low demanders subsidize high demanders under CI, whereas, no such cross-subsidization exists under HMOs. This makes ambiguous the effect of heterogeneous demand on general preferences for the two methods of insurance. Second, there appears to be no theoretical basis for assuming that the size of the welfare loss under CI is virtually unaffected by heterogeneous demand. Heterogeneous demand can be shown to increase the welfare loss under a CI plan when this loss is more accurately measured. Thus, the effect of heterogeneous demand, at least in theory, is for this reason much more ambiguous than the Benjamini and Benjamini article implies. The first point is demonstrated with the use of Figure 1. A single, precisely defined unhealthy state, X, and the divergent medical care demands of two representative individuals, A and B, are assumed. A and B are identical in terms of health risk but have differing demands for medical care because of differences in income, tastes, etc. Their respective demands for medical care under a specific CI plan are depicted in Figure 1. Zero administrative costs and a coinsurance rate of .2 are assumed. The price per unit of care is assigned a value of 10 and is equal to marginal cost, which is assumed constant. Under these constraints, individual A de-

In a recent article (Yew-Kwang Ng, 1987), Ng demonstrates that taxes on goods whose utility is derived entirely from their market value (diamond goods) can provide revenue to the government with no cost to the taxpayers aside from the administrative costs of collecting them. Such a tax decreases the quantity of the good produced while proportionally increasing the value per unit quantity. Since the utility of the good depends only on its value, the smaller quantity produced (after the tax is imposed) produces the same total utility to consumers as the previous larger quantity. The revenue collected by the government is paid, in effect, from the reduced cost of producing a smaller quantity of the good. Ng mentions a number of earlier discussions of goods whose utility comes in part from their price. He is apparently unaware of an analysis which is both much earlier and much closer to his than any he cites. In Chapter 13 of the Principles of Political Economy, David Ricardo wrote: