(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 237

212 PART 2 • Producers, Consumers, and Competitive Markets
the maximum achievable health outcome for the
population as a whole, as a function of the dollars
spent per capita on health care inputs. Points on
the production function such as A, B, and C are by
construction inputs that are being used as efficiently
as possible to produce output. Point D, which lies
below the production function, is inefficient in that
the health care inputs associated with D do not generate the maximum possible health output.
Notice that the production function exhibits diminishing returns: it becomes relatively flat as more and
more money is spent on health care. For example,
the health output at point B is quite a bit higher than
the output at point A since the marginal productivity
of health care expenditures is high. Starting at point
A, an additional $20,000 of health expenditures (from
$10,000 to $30,000) increases life expectancy by 3
years. However, output at C is only slightly higher
than the output at B, even though the difference in
health inputs is large. In moving from B to C, an additional $20,000 of health expenditures increases life
expectancy by only 1 year. Why is this? The answer
is that given current medical technologies, additional
expenditures on medical procedures and/or the
use of newer drugs has only a minimal effect on life
expectancy rates. Thus the marginal productivity of
dollars expended on health has become less and less
effective as the expenditure level increases.
We can now see one possible explanation for
the high level of health-care expenditures in the
United States. The United States is relatively wealthy,
and it is natural for consumer preferences to shift
toward more health care as incomes grow, even as it

becomes more and more expensive to obtain even
modest increases in life expectancy. (Recall our discussion of health care choice in Example 3.4.) Thus,
Americans may have been seeking better and bet-

ter medical outcomes, but with limited success, given
the shape of the health care production function. In
other words, compared to other countries, the United
States may be operating farther to the right along the
flat portion of the health-care production function.
There is another explanation, however. It may
be that the production of health care in the United
States is inefficient, i.e., higher medical outputs
could be achieved with the same or similar input
expenditures if those expenditures were more
effectively utilized. In Figure 6.3, this is shown as a
move from point D to point B; here with no additional expenditure life expectancy is increased by
1 year by using inputs more efficiently. A comparison of various measures of health and health care
across a number of developed countries suggests
that this may indeed be the case. First, only 28 percent of primary care physicians use electronic health
records in the United States, compared to 89 percent in the United Kingdom and 98 percent in the
Netherlands. Second, the percentage of chronically
ill patients that did not pursue care, did not follow recommended treatments, or did not take fully
recommended medications was 42 percent in the
United States compared to 9 percent in the United
Kingdom and 20 percent in Germany. Third, the
billing, insurance, and credentialing system is more
complex and burdensome in the United States than
in many other countries, so the number of health
care administrative personnel per capita is greater.
Both explanations for U.S. health care spending

probably have some validity. It is likely that the United
States indeed suffers from inefficiency in health care
production. It is also likely that as U.S. incomes grow,
people will demand more and more health care relative to other goods, so that with diminishing returns,
the incremental health benefits will be limited.

E XA MPLE 6.2 MALTHUS AND THE FOOD CRISIS
The law of diminishing marginal returns was central to
the thinking of political economist Thomas Malthus
(1766–1834).6 Malthus believed that the world’s limited amount of land would not be able to supply

6

enough food as the population grew. He predicted
that as both the marginal and average productivity of
labor fell and there were more mouths to feed, mass
hunger and starvation would result. Fortunately,

Thomas Malthus, Essay on the Principle of Population, 1798.