Another factor that affects health-promotion behavior is the individual’s valuation of benefits in different time periods.

MRS. SIEGAL HAS TWO ALTERNATIVE ACTIVITIES TO HELP RELIEVE HER BACKACHE. IN THE FIRST, SHE CAN VISIT…

Read this and answer exercise #4 4.7.2 Limitations of the Model

The theory of the demand for health
care under conditions of uncertainty has the virtue of explicitly organizing
some of the variables that are central to the decision to engage in activities
that promote health. As presented, however, it has an important limitation.

The reader may find it strange that
the utility function, which is supposed to measure satisfaction, does not
include health. This is indeed a shortcoming of the model, because well-being
can depend on health status as well as wealth. The model looks only at
financial aspects of the situation, in effect assuming that the care fully and
instantly restores health, with no utility implications of either the illness
or the process of getting care. Clearly this is an unrealistic assumption.
Including health status creates a much more complicated model that is more
difficult to apply, and while it is important to understand that we have
abstracted from reality, this should not detract from the value of the model.
The present model has the virtue of focusing on the benefits of risk shifting,
which is an economic good that is distinct from medical care.

4.7.3
Discounting Future Values

Another factor that affects
health-promotion behavior is the individual’s valuation of benefits in
different time periods. Health promotion activities, such as the use of
condoms, smoking cessation, vaccinations, and clean needles (for drug users)
and unhealthy activities, such as smoking, engaging in unsafe sex, and
excessive drug use, generally do not have good or bad impacts on health
immediately. It takes a long time, sometimes years, for individuals to
experience adverse health effects. The timing of health benefits will have an
influence on the demand for health-related activities that promote these
benefits.

It is generally assumed that $1,000
in current benefits will be worth more to an individual than $1,000 in benefits
one year from now. The value of the preference for earlier rather than later
periods can be expressed in terms of a discount rate, called r. If an
individual is asked how much money he or she would accept at the end of 2001
rather than have $1,000 at the beginning of 2001, the person might take $1,100
at the end of the period. In other words, $1,000 on January 1, 2001, would be
worth as much as $1,100 one year later. The discount rate is .1, and the
discounting equation is be expressed as $1,000 × (1 + .1) = $1,100, or
symbolically as $1,000 × (1 + r) = $1,100. This may be rewritten as
$1,000 = $1,100/(1 + r). This equation says that, in the individual’s
eyes, $1,100 one year hence will be equivalent to $1,100/(1 + r), or
$1,000, now. The discount rate for an individual is derived largely from
introspection—from an acceptance that a given future amount and a lesser
current amount provide the same satisfaction at the present moment.

The same principle holds for


 

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