2.2.5 | Fiscal Incidence Methods | Masters in Health Economics
Why It Matters
Because fiscal incidence and DiD provide a rigorous way to identify who truly benefits from health policies, they help governments design equitable, cost‑effective interventions.
Key Takeaways
- •Fiscal incidence measures who truly bears tax and spending burdens.
- •Difference‑in‑differences isolates policy effects by comparing treatment and control groups.
- •Parallel‑trend assumption is critical for valid DiD analysis.
- •Mis‑specifying control groups leads to biased estimates of policy impact.
- •Proper data, software, and interaction terms improve DiD reliability.
Summary
The lecture introduces fiscal incidence – the study of who actually bears the economic burden of taxes and government spending – and explains why it matters for health‑economics policy analysis.
It then presents the difference‑in‑differences (DiD) technique as the standard tool to measure the real impact of health policies. By comparing outcomes before and after a policy for a treatment group against a comparable control group, DiD removes common time trends and isolates the causal effect.
The instructor illustrates the method with a cigarette‑tax example, showing how a 10‑pack baseline dropping to six packs in the taxed state (‑4) versus a two‑pack drop in the neighboring state (‑2) yields a net policy effect of –2 packs. The core formula (ΔT‑ΔC) and the need for parallel trends, no spillovers, and stable group composition are emphasized, along with software options such as Stata, R, and Excel.
Accurate DiD estimates enable policymakers to assess whether interventions like free hospital services, Medicaid expansions, or drug‑price caps are progressive or regressive, guiding evidence‑based resource allocation in the health sector.
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