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A Model Using Household-Income and Household-Consumption Data to Estimate the Cost
and the Effectiveness of Subsidies
Lorenzo Sabatelli GLOB MOD
Dean T. JamisonUniversity of Washington
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Consumer Choice, Health Risk, and Policy
Global Health-Risk Factors
Childhood underweight
Household air pollution from solid fuel
High blood pressure
Suboptimal breastfeeding
Tobacco smoking and second hand smoking
Ambient particulate matter pollution
Diet low in fruits
Iron deficiency
High fasting plasma glucose
High body-mass index
Diet high in sodium
Alcohol use
Unimproved sanitation
High total cholesterol
Diet low in nuts and seeds
Vitamin A deficiency
Diet low in vegetables
Diet low in grains
Zinc deficiency
Unimproved water source
People do not choose to become ill, choose to be happy
Individuals and Households make choices on the
purchase of goods and services
They try to optimize the use of available resources to
maximize the satisfaction of their perceived needs
(Maximization of Utility)
Some choices may be optimal, but not for health
Governments can use financial instruments, such as
subsidies, to influence consumer choices
Subsidies decrease the out-of-pocket price of certain
goods to the consumer, increasing demand
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Data on
Household
Budget
Allocation
Data on Household
Income and Consumption
Data on
Utility and
Income
Cost and Effectiveness of Subsidizing the Installation of Household-Based Sanitations in Rural India
Case-Study
MODEL
Cost and Effectiveness of Subsidizing the Purchase of Health-Relevant Goods
Overview
Do not reproduce without the express written consent of the authors
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Parameter Intuitive Definition
Income Elasticity of Demand
The percent change in the demand for a class
of goods (e.g. food, clothes, housing) due to a
1% increase in income, when prices remain
constant.
Uncompensated Own-Price Elasticity of Demand
The percent change in the demand for a class
of goods (e.g. food, clothes, housing) due to a
1% increase in the average price, when income
and the price of other goods remain constant.
Budget Share The proportion of a consumer budget used to
purchase goods of the class of interest.
Quantities of Interest
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Elasticity of the Marginal Utility of Income
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The Model Recipe
BUDGET
SHARE
OF GOOD
X
INCOME ELASTICITY OF
DEMAND OF GOOD X
ELASTICITY
OF THE
MARGINAL
UTILITY OF
INCOME
Price Elasticity of Household-Based Sanitations in Rural India
UNCOMPENSATED OWNPRICE ELASTICITY OF DEMAND
OF GOOD X
Do not reproduce without the express written consent of the authors
GLOB MOD
Utility increases with income, with decreasing margins (convexity)
Consumers allocate their own budget to the purchase of goods and services in a way that
maximizes utility
Demand adjusts to changes in prices and in income in a very short (negligible) time
Preference Independence: the utility associated with the consumptions of one class of goods
does not depend on the consumption of goods of a different class (no interaction)
These assumptions are the basis of the so called Florida Preference Independence Model
Model Assumptions
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Uncompensated Own-Price Elasticity vs. Income Elasticity
ModelAssumptions
Demand Equation
Relationship betweenprice-elasticity and income-elasticity
To protect the confidentiality of unpublished results this slide is different from the original used in the GHME 2013 conference
Price Elasticity = function (Income Elasticity; Budget Share; Elasticity of the Marginal Utility)
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Background
60% - 70% of households without latrines
Absence of improved sanitations is a major
public-health risk factor
Data Sources
District Level Household and Facility Survey
(DLHS) provides health care and utilization
indicators at the district level
Asian Development Bank statistics and
policy documents
APPLICATIONSubsidizing the Installation of Sanitations in Rural India
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What is Income, by the way?
Permanent-income was estimated on a log-
scale with a random-effects probit model
using household asset ownership as a
(probabilistic) proxy for household income
Calculation of Income, Income Elasticity and Other Parameters
Calculating the income elasticity with a Mixed-Effect First Difference Regression using
DLHS-2 and DLHS-3 data
Parameter Value
Annual cost of one basic improved-sanitation facility
5.5-11 US$
Current sanitation coverage ~32%
Total number of households 140 millions
Additional parameters
To protect the confidentiality of unpublished results this slide is slightly different from the original used in the GHME 2013 conference
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Results
Additional Number of Households with Sanitations
Annual Cost to the Policy Maker
Please note: These results are preliminary. Do not reproduce without the express written consent of the authors
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Within the framework of the Florida Preference Independence Model, a relationship exists
between the uncompensated own price elasticity of demand and the income elasticity of demand
for a given class of market goods.
When used to study the impact of subsidizing sanitations in rural India, the model provides
probabilistic estimates of the achievable increase in coverage and of the potential cost to the
government, as a function of the subsidized fraction of the price
The proposed approach may provide a fast and inexpensive method for broad brush
assessments that could help design policies and set public-health priorities.
Future developments are likely to involve: technical improvements of the model here presented;
expansion to other financial instruments; and developing user-friendly software tools for
simulating the impact of financial instruments in health policy.
Conclusions and Future Developments