MARKETS AND MARKET FAILURE IN HEALTH SERVICES

Health Economic Course Series

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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