Health care and the Market

(in a Free Market)

1

 Perfect competition
 A complete market
 Consumers are rational maximizers
 Equitable distribution of Resources

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 Free Market Economy
2

Health care and the market

Supply induced demand

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 Perfect competition
3

 Free entry and exit. There is excess profit to be

made so more people can freely join in
 Perfect knowledge (information asymmetry)
 Homogenous product
 Equal cost
 Decreasing or constant returns to scale

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 Complete Market
4

 Markets work best when all the

costs and benefits of a product
are taken into account when
setting price
 Positive Externalities
 Negative Externalities
 Caring Externalities

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 A complete market
5

 Costs & benefits are restricted to

those engaged in trading in the
particular goods
 The supplier suffers the full cost
of production; no spill-over costs
to society
 Benefits are restricted to the
buyer, who faces the full price
(i.e. no free riders)

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 Consumers are rational
maximizers 6

 Need for full knowledge of the product,

its effectiveness and appropriateness
 And able to use it to plan consumption
decisions.
 Health care is a derived need
 Uncertainty of when
 We need health not health care

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 Uncertainty
7

 Uncertainty means that consumers will not be able

to plan their consumption of healthcare
 The risk associated with uncertainty leads to the
development of health insurance markets
 The insurance is for financial costs of ill health but
not for ill health as such

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 Uncertainty
8

 The insurance markets also come with their

secondary problems that cause insurance markets
to fail namely:
Diseconomies of scale due to high cost of small
insurance firms (an exploitation from large
monopolies)
Moral hazard (Consumer and provider)
because of loss of the price signal and cost
consciousness
Adverse selection (Less risk fall out and
insurers cream off)
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 Equitable Distribution of Rs
9

 Facilities
 Income
 Political will

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 Reasons for Government
intervention10

 Market failure (for the reasons provided

in the previous slides)

 Ethical considerations

 Political reasons

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 Ethical considerations
11

Is a service ‘industry’ whose ethics are:

1. Beneficence
The obligation of health care workers to help people in
need
2. Nonmaleficence;The duty of health care
providers to do no harm
3. Autonomy; The right of patients to make
choices regarding their health care
4. Justice; The concept of treating every one in
a fair manner

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 Externalities
12

 Two types of externality exist:

 Externality can be positive or negative
 Markets with extreme positive externalities become
public goods.
 Selfish externality e.g. vaccination – the fact that
someone is vaccinated also makes another happy
because he may not get disease through that
vaccinated person

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 Presence of Externalities
13

 Caring externality – we derive happiness seeing

other people getting care even if it has no direct
benefit on us
 Markets will fail to produce society’s appropriate
level of goods with positive externalities
 To rectify the problem the government intervention
is to fund healthcare with taxation or public health
insurance.
 Existence of externalities is also responsible for
creation on non-profits

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 Supply induced demand
14

DL2 SL1
wage 1 DL1
i3 SL2
i2

i1

Y1 Y2 Y3 Y4 labor

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 The agent concept
15

 The ideal situation should be like this:

 Thedoctor gives the patient all the
information the patient needs in order
that the patient can make a decision and
the doctor should then implement the
decision of the patient

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 The Agent Concept
16

 However the more familiar situation is this:

 Thepatient is there to give the doctor all the
information the doctors needs in order that
the doctor can make a decision and the
patient should then implement the decision of
the doctor

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