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MARKETS AND MARKET FAILURE IN HEALTH SERVICES
Health Economic Course Series
http://diankusuma.wordpress.com
Definitions
• Market = where demand and supply adjust through price. can be seen as a tool or mechanism, for allocating resources in a society.
• Market failure = all the ways in which a specific market may not meet the conditions for social optimality. E.g. if there are barriers to entry, or a lack of information, then that market will fail to produce the best possible outcome.
• In bureaucracies “government failure” = the ways in which a bureaucratic approach may fail to optimize social welfare.
Market mechanism
• Markets produce goods efficiently by balancing demand and supply through the price mechanism
• Market distribute goods according to the ability and willingness of consumers to pay for them – demand/supply.
Conditions for perfect market
1. Perfect information- Symmetric
2. ‘Rational’ behavior- Incorporating both individual and societal costs/benefits
3. Market exists- for all products desired by all people
4. Many buyers and sellers, homogenous products- so each is price taker
5. Equity or politics not considered
Market failures
1. Imperfect information2. “Irrational” behavior3. Externalities4. Public goods5. Incomplete competition
Reason for government intervention:Regulation, legislation, provision, …
Also: social equity
Information asymmetric
= One party to a transaction has better information that the other.e.g. car salesman, market for insurance or credit.
Leads to less than ideal provision:-People avoid products-People pay less/more than what is might be worth
Unless:-use of warranty, reputation-Performance related payments-Norms and standards
Information asymmetry - Health
Uncertainty about products:
• Knowledge patient/doctor• Difficult to distinguish products (heterogeneous)
– Supplier-induced demand– Over/under-production– Low quality, high price
• Role government:– Accreditation– Quality Assurance– Health education
“Irrational” behaviour
= People might not always do what is best for themselves (still “rational” choice based on personal utility)
Leads to:
- Over-consumption of “bad” goods (cigarettes)
- Under consumption of “good” goods (education)
Need to change incentives…
“Irrational” behavior - health
• Merit goods (good goods)= vaccines, vitamins, physical activity
• De-merit goods (bad goods)= cigarettes, drugs, speed
• Role government:– Health education– Subsidising / taxing consumption– Legislation
Externalities
• Side-effect of consumption or production of goods and services, that are not considered when consuming/producing.
• Positive externalities:– Individual benefit < social benefit– Individual cost > social costUnder-production / consumption
• Negative externalities:– Individual benefit > social benefit– Individual cost < social cost Over-production / consumption
e.g. well-kept front garden, public artwork, volunteer, vaccine
e.g. pollution, over-fishing, smoking
Externalities - Health
• Positive externalities• E.g. prevention contagious disease, immunization,
treatment STDs, caring
benefit of consumption/production is lower for individual for society as a whole
price paid will be below price it is worth supply will be below what is ideal for society
• Role government:– Subsidize consumption/production– Provision create market– Funding
Public Goods
• = non rival and non-exclusive good
• E.g. radio broad cast, fresh air…
• Impossible to set a price:– Non payers can not be excluded– Extra consumer doesn’t lead to extra costs
• No body willing to pay (free riding)• Nobody willing to supply
No additional costs of extra consumer
No one can be excluded from consumption
Public goods - Health
• Healthy society:–Everyone benefits–Incentive to “free ride”: leave the healthy life-style and preventive measures to others.
e.g. incentive not to be vaccinated if everyone else is? Who would invest in R7D for medicines in a completely liberalized private market?
Role of government:-Subsidize consumption/production-Provision-Funding-Regulation (e.g. patient law)
Incomplete competition
= One or few providers of goods (monopoly: single seller), or one or few buyers of a goods (monopsony: single buyer), who thus have power in the market to influence prices.
e.g. OPEC: artificially high prices because of power of suppliers (as long as no alternatives) artificial shortage of oil
e.g. hirer of daily wage labour: few offering work (demand), ability to pay very low wages (low price) artificial surplus of labour
Incomplete competition - Health
• Health care facilities often monopolies:– High start-up cost (investment in building and equipment, risks)– High barriers to enter market as supplier (specialized, long
training, licensing)
• Limited choice for consumer:– Price set higher that costs, no incentive to be efficient or to
provide quality services
• Role of government:– Provision– Quality control– Price regulation– Legislation
Equity• Equity = being fair or just.
• Perfect market
technical (how) and allocative (what) efficiency, regardless of who gets
so inequality is not a market failure
BUTStill reason for government intervention
Trade-off between equity and efficiency?
Social welfare as positive externalities?
Equity - Health
• Health = Human right
• Ethical duty of health workers to treat according to need, not ability to pay.
• In private market:Less supply at higher price than ideal for society
• Role government:– Guarantee human right for good health– Provision– Subsidizing– Funding
Recap…Perfect market
Market failures
Government interventionLegislation, regulation, subsidizing/taxation, funding, provision, social protection, …
Government failures
1. Imperfect information2. “irrational” behavior3. Externalities4. Public goods5. Incomplete competition6. Equity
D=S, price adjusts, efficiency
Government interventions
Enabling
Changing environments in which private agents
make decisions
Public Provision
Government provides health care services itself
Examples:
Subsidies, user fee, exemptions, quality
standards, regulation
Examples:
NHS, vaccination programme, research
Government failures
• Asymmetric information– Government less specialized, and same information problems as
market
• Incentives– If no profit motive, incentive to reduce costs?– Without price mechanism, incentive to produce/consume at
optimal levels?
• Assumption of benevolent government– People excluded in economic, social and political “markets”– Incentive of electoral cycles – short term vision– “Regulatory capture” – vested interests, corruption
Market and government - health
• Elements of both market & government in health care:– Public funding of primary health combined with user
fees for other, less essential services– Private health insurance combined with social
insurance– Government subsidies/funding of education for health
care workers but re-payment of student loans by employed workers
– Health education and information to assist consumer choices
– Public sector contracting to private sector.
Thank You