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Health subsidies, prevention and welfare

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  • Luca Marchiori
  • Olivier Pierrard

Abstract

Health subsidies involve public budgetary costs. However, they generate a positive externality by encouraging participation in health-improving initiatives, which help reduce future health care costs. We build an overlapping generations model with a government subsidizing investment in health by the young generation and paying the health care costs of the old generation. We find that the welfare-maximizing subsidy rate depends positively on health externality and the size of health care costs, and negatively on the discount factor. The subsidy rate should therefore be high when prevention more effective at cost saving and when the population is myopic about the future. Moreover, the welfare-maximizing subsidy rate is lower than the health-maximizing rate but higher than the capital-maximizing rate.

Suggested Citation

  • Luca Marchiori & Olivier Pierrard, 2020. "Health subsidies, prevention and welfare," BCL working papers 139, Central Bank of Luxembourg.
    • Handle: RePEc:bcl:bclwop:bclwp139
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    References listed on IDEAS

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    Cited by:

    1. Chang, Tsung-Sheng, 2021. "Social distancing in retail: Influence of perceived retail crowding and self-efficacy on employees’ perceived risks," Journal of Retailing and Consumer Services, Elsevier, vol. 62(C).

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    More about this item

    Keywords

    Overlapping generations model; health subsidy; welfare;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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