What are the economic arguments for and against government intervention in healthcare?
FN4001 Economics 2018
In this report I will define market failure and look at the model of the perfect market, I will them compare this with the health care market and find out the causes or factors that resulted in failure in the health care market. I will also look at the ways government in four different countries have intervenes to ensure that the causes of the market failure are corrected. Market failure can be defined as a situation whereby there is a failure to achieve an efficient allocation of resources within the market economy (reference)
A fundamental problem with the concept of market failure, as economist occasionally recognise is that it describes a situation that exists everywhere (Nelson 1987; Dahlmam,1979). There are different kinds of market that exist in society with the perfect market and monopoly at the extremes and the others in between this spectrum.
Table of contents Report introduction
The market model also referred to as a competition is the most important model because it serves a benchmark from which other kinds of Mark can be viewed. The main objective of any firm in the market is to maximise profit and the price of the goods and service are determined by market forces.
The first reason for this cause of why the health care market is different is that health care is a public good which is different from a private good as seen in the perfect market model, public good has two features which are the non rivalries which means that the use of it by one person doesn’t stop another from benefiting from it, and it is non excusable, this means it will be difficult to prevent people from enjoying the benefits. Reference
With public good there is what is known as a free rider problem, where people will not pay for them because others are willing to pay for them. The nature of public goods creates a problem for the market because the private sector will not make profit from their provision since everyone can enjoy it whether they pay or not. Health care is also public good and under provision of it which also leads to market failure. Health care is also a merit of good that society values and believes that people should have them because consumption is believed to generate positive externalities. Reference
Externalities is also referred to as a third party which effects occur when others are affected by the transaction arising from the production and consumption of health care for which the costs or benefits that are not taken into account. “The core of the argument against market failure analysis is derived from the study of transactions “. (Zerbe e.g. am p7)reference. Whenever there’s is a transaction externalities are known to occur which leads to transaction costs. This is defined as “the resources necessary to transfer, establish and maintain property rights”(meaning and reference).
The property rights was developed by R H case where he started that individuals form firms to reduce transaction costs (reference). Externalities may rise in different ways and may be either positive or negative and can be during production or consumption. Examples of a negative externalities is smoking which results in external costs on third party which also means passive smoking and also alcohol ingestion can lead to antisocial behaviour. Vaccination against infectious diseases is a form of positive externality where an individual is a certain of protection by the condition of another person, an example of external cost of production is via pollution is the patent rights given to firm from copying the products, where there are externalities in health care this will not lead to perfect market hence market failure will occur. The externalities discussed so far can be referred to as caring externality which occurs when individuals get personal satisfaction from knowing that a person is getting the health care they need. Reference. Externalities are around us every day but they are not taken into account whenever there is a transaction, this is because property rights are not well defined. Health care is not owned by anyone so therefore there is economic incentive to protect it and the only way the property rights can be well defined and protected will be though government regulation e.g. by banning smoking in public places and also making vaccinations compulsory. Reference Even with government legislation it is difficult to achieve this. In a world which property rights are fully specified and In which transaction costs are at zero, the allocation of resources will be efficient. This kind of world doesn’t exist and this is an indication that market failure will always occur.
From the discussion it can be seen that intervention is necessary to counteract the causes of market failure as well as the consequences such as adverse selection and moral hazard. Reference on government intervention and regulation of health care MarketBroadway and Wildasin(1984, p61) suggest that ” while typically the remedy for market failure due to public goods is for the public sector to provide the good, the remedy for externalities is often to provide incentives to the private sector to produce the correct amount.”
We will examine detailed evidence from four countries, the United Kingdom, the United States of America, France and Finland to ascertain how they intervene and regulate their health care systems. One of the main ways of solving market failure is through public finding of the health service. Referencein the UK, France and Finland hospitals are funded through taxes but in the UK it is through general taxation while France and Finland use a social insurance system. The system ensures universal coverage for the population, prevents exploitation of patients by monopoly of providers. The main problem is the issue moral hazard which is more common in publicly tax funded system in UK than the social insurance system of Finland and France Reference. Donaldson and Gerard (1993, p72) argued that ” even the US health care system recognises the shortcomings of total reliance upon market forces. The main form of government regulation there is in the form of insurance schemes for elderly people and indigent people “. But in the USA, adverse selection is very common and it also occurs in the UK but to a lesser extent, but this is almost non existent in the social insurance system.Government intervention must take into account the cost benefit analysis, if the analysis benefits are more than the costs, then the government should collect taxes and provide for the good.
Government failure can occur when mechanisms put in place to improve market failure workers the situation and lead to inefficiency and inequity in the health care and also create distortion. Referencein all four countries political self interest can lead to inefficiency and make the market failure already present because politicians can design policies to regain power rather than maximise efficiency. Also government can lack information just as much as the market because most of the times the government do not know what kind of health care the consumer really needs and provides this based on the information they have and may not even know the full costs and benefits of the policy. Bureaucracy referenceMost times procedures of the government are usually cumbersome and this cuts across all the four countries. Government respond more slowly to changes and also the time it takes from planning to implementation may cause policies to be ineffective.
Market failure is known to exist in all market economy and the health care market is not an exception. It has been shown that there are reasons why health care market may not work efficiently, thereby necessitating government intervention. Health care is a public good and coupled with the externalities and information gaps are causes of market failure which requires correction but a sufficient justification for government intervention. Interventions is known to be costly, so therefore for it to be effective a cost benefit analysis to suggest it is worthwhile needs to be undertaken to avoid government failure which lead to market failure in itself.