Government-Created Externalities Stemming from Intervention in Health Care Markets

June 11, 2009

As members of Congress and the nation continue the debate surrounding health care reform, issues of affordability, quality, and costs are at the forefront of the agenda. Both sides bring out their talking points. On the left, it’s equal access. On the right, it’s the argument that the government is inefficient. But even if you agree that market failures currently exists in the health care market (or even a market that was pure private), there is a government created problem that lurks on the horizon in a system of greater external costs for health care that has not been discussed much.

When a large fraction of the marginal cost of Adam’s health care is borne by government (and thereby other taxpayers), every other person in society has an interest in keeping Adam healthy. And can you blame them? After all, why should Chris have to pay for the costs of Adam’s unhealthy lifestyle choices when Chris eats a perfect diet and exercises 6 days per week? You can see where this leads: we end up creating a system whereby society will end up regulating Adam’s unhealthy lifestyle choices, not in a strictly anti-liberty paternalistic sense but rather to limit the costs to others in society from that lifestyle, which could actually be considered as being pro-liberty. In other words, having a system whereby other taxpayers bear a significant portion of a typical citizen’s health care costs creates an externality in itself, thereby leading to the sensible next step which is for government to internalize that externality via more regulation (or possibly taxation to discourage certain activities).

But in a supposedly free society, we have to ask ourselves: how far can this go? For example, ever since the 1980s, a growing portion of the health care sector is fighting diseases related to sexual activity. What if it was the case that banning extra-marital sexual activity would limit the spread of STDs and thereby limit the costs of health care imposed on the government and thereby everyone else in society by those “irresponsible” people? If we follow the logic of those who use this argument (often incorrectly) as it relates to obesity, alcohol, tobacco, etc., shouldn’t it extend to the bedroom as well? Or would you say freedom (or privacy) matters when it comes to whom you sleep with, but not when it comes to what soda you put in your body?

And what about other risky behaviors? Should the government pay for health care costs resulting from skydiving injures? How about one who rides a bike without a helmet, or who races go-karts at the local county fair? Should we control how much television each person watches, or mandate exercise for adults? You see, since Chris exercises 6 days per week, that benefits others in society, just as Adam’s driving go-karts on the same weekend when he has an active sex life with multiple partners can impose costs on others.

In summary, one of the logical conclusions of having a system (in anything) whereby a third party bears a significant portion of the costs is either more regulation or some tax/subsidy to internalize that externality. We see it with the private market in pollution whereby government improves societal well-being by taxing pollution. But what about when the government action helps add to that third party costs? Shouldn’t such a problem created by government intervention in the first place enter into the debate over whether to create such a system in the first place?


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