From: DGS4@psuvm.psu.edu
Newsgroups: talk.politics.misc,talk.politics.theory
Subject: Re: Canadian vs US health care
Date: 11 Sep 92 17:41:17 GMT
 <92255.112110DGS4@psuvm.psu.edu> <1992Sep11.164226.26879@ncar.ucar.edu>
Organization: Penn State University

In article <1992Sep11.164226.26879@ncar.ucar.edu>, gary@khonsu.cgd.ucar.edu
(Gary Strand) says:
>
>ds> Dennis Shea
>gs> GaryStrand
>
>gs> I always thought externalization of costs and internalization of benefits
>    was something to be avoided. We read all the time about how polluters
>    should pay for the costs of their pollution, rather than externalize those
>    costs to the rest of us. Does the principle still apply when it comes to
>    health care, or not?
>
>ds> In fact, the aim would be to internalize all costs and benefits, that is,
>    to try and make people account for all costs (both to themselves and to
>    other members of society) in making decisions.  If you can set up a system
>    to do so AND there are no other problems in the market (monopoly power,
>    uncertainty, etc.) THEN a free market has certain desirable properties.
>
>  Well, you're partly right, and alotly wrong. The intent is to internalize
>  costs and *externalize* benefits as much as possible; the market does not
>  create monopolies, governments do; and "uncertainty" is a problem because
>  we humans are not omniscient. I have yet to hear of a bureaucract that was
>  able to foresee the future and avoid uncertainty.

No, Gary.  A free market does not operate well if there are any external
costs or benefits.  Coase argues that if you can assign property rights
to all externalities (both costs AND benefits) then the free market can
perform its usual magic.  Assigning property rights, however, is a
nontrivial societal problem.

Monopoly occurs naturally without government for a number of reasons.
Large economies of scale in proportion to the market can, in fact, create
a monopoly without government intervention.  In addition, as Arrow pointed
out 3 decades ago, under conditions of uncertainty consumers may establish
long-term relationships with physicians, which, in effect, gives the
physician monopoly power.  In fact, the primary explanation for monopoly
power in medical care these days, is consumer uncertainty about physician
quality and the costs of search.  Several days ago I posted a paragraph
from Charles Phelps' new book on Health Economics in which he explains
this.  You might want to try and search back for it.  If you can't
find it let me know and I'll re-post it.


>ds> If external costs and benefits cannot be internalized OR there is more
>    than one source of market failure, THEN alternatives to the free market
>    may be both economically desirable AND politically necessary.
>
>  So far, you're not talking about the market for health care. Costs are in-
>  ternalized very easily: *you* get hurt or sick, *you* pay for it.

O.K., I 'll give you a more specific example.  Immunizations provide benefits
not only to the person immunized, but also to those who have their risk of
catching the disease lowered since one fewer carrier now exists.  As a
result of this external benefit, which will not be accounted for in the
decisions made by individuals, immunizations will be under-provided by the
market.

Another example:  Use of antibiotics encourages the development of resistant
organisms.  The cost of this development, however, accrues to all members
of society, not just to the person who might be thinking of using the
antibiotics.  What is economically rational for an individual ignores the
cost to society of the development of resistant organisms.  As such, if the
free market were allowed to operate, it would result in over-use of
antibiotics.

>  BTW, why is the health care market different from the car market or the
>  food market?

Few other markets show the combination of externalities, uncertainty, and
asymmetric knowledge that is found in health care.  These three are
pervasive in this markets.  Proving that free markets work best under
multiple market failures is not easy.  A vast literature on the
"Theory of the Second-Best" shows this.

>ds> The answer depends on whether or not a functioning free market for health
>    care can work. IMO, the American free market gave it an admirable try and
>    is now failing.
>
>  The free market never got a chance.

In your opinion?



>
>ds> Rising levels of uninsurance and and underinsurance coupled with rising
>    costs indicate the failing of the market.
>
>  And the government is going to contain these costs? Haha.
>
>  I'd be more afraid of a national health care system if the private insurers
>  were in *favor* of it. Can you imagine, a guaranteed return on their dis-
>  bursements, courtesy Dennis Shea, American taxpayer. Why, I'm surprised they
>  haven't realized that there's plenty of room for them at the public trough.

In the last 8 years, Medicare has constrained the costs of hospital inflation
much better than private insurers.  Maybe if you weren't blinded by your
ideology, you could examine the evidence more objectively


Dennis G. Shea, Penn State
"I believe that there is social and psychological justification
for significant inequalities of incomes and wealth....But it
is not necessary....that the game should be played for such
high stakes as at present."  John Maynard Keynes
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