A 50,000-Foot View of Government’s Role in Health Care

September 10, 2009

There are many areas of society where the outcome of the free market does not maximize social well-being. In other words, markets do fail. So in these areas, there is the potential for government to improve social well-being. This leads us to two questions: (1) In what areas is the free market failing to maximize social well-being? and then (2) Are the expected benefits of a given government policy designed to combat the market failure greater than the expected costs?

This is the framework with which we should be analyzing all government policies, including the proposed policies in the area of health care.

Obviously, a purely free market in health care would not maximize social well-being relative to a utopian situation in which a purely benevolent government with adequate information corrected the market failures. The problem though is that government policymakers are likely not going to propose the best policy solution on top of the fact that government administration is not costless. So we are always faced with questions of second bests on health care policy (like almost all government policies).

Just because somebody says a free market in health care doesn’t produce as good an outcome as the free market in say potato chips due to the various market failures in health care (e.g. moral hazards, adverse selection, lack of competition in health care, distributional concerns, public health, etc.) doesn’t mean that government doing “something” in response is automatically going to make society better off. That “something” must be better than the imperfect free market alternative, or else we need to head back to the drawing board.


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