TOPIC THREE
MARKETS AND MARKET FAILURE IN HEALTH AND HEALTH CARE
3.1 INTRODUCTION
In this topic, we discuss market and price mechanism, theory of perfect competition, market
failure, main types of market failure, causes of market failure, and the role of government in
provision of health care.
3.2 TOPIC OBJECTIVE
At the end of this lecture you should be able to:
Define market and market failure
Discuss the main types of market failure
Explain the role of government in provision of health care.
3.3 Background
In this sub-topic, we look at the general background of the markets for health care. We explore
the various questions considered in analyzing health care markets.
- "Is health care in some way fundamentally different from food, clothes or any other
commodity which is distributed through the market? Are there special characteristics
1
, distinguishing medical care from these other goods? Why should society's objectives be better
achieved by non-market provision?" (Le Grand and Robinson 1976 pp. 32-33).
- These questions are typical of those that are frequently raised in the debate on the nature of the
commodity 'health' and the most appropriate organizational context for its optimal production,
allocation and delivery.
- They reflect the two aspects of the debate:
o First, technical arguments about the functioning of the health care market; and
o Second, more fundamental arguments about the nature of society's objectives.
- The second concern more basic issues because only when society's objectives are established
can 'optimal production, allocation and delivery' be defined and understood.
- However, the current debate focuses around the technical issues. For example, there are those
who argue that health care is not different and can be allocated via market mechanisms in the
same way as other goods and services.
- On the other hand, there are those who argue that health care is in some ways different, and
requires the modification or replacement of market mechanisms.
- This focus reflects the establishment of efficiency as the central societal objective and the
understanding of 'optimal' as 'most efficient'.
- However, a second important objective is that of equity, which is still a central policy objective
within many government health care systems.
- It remains important for practical policy-making, therefore, to consider whether, and to what
extent, the operation of the health care market achieves equity.
- The changing balance between equity and efficiency as policy goals helps to explain why the
extent to which governments have intervened in the free operation of the health care market
varies from country to country and has changed over time within countries.
- In considering these issues three groups of questions will be addressed in this topic.
2
, o First, technical issues: what is the rationale for the market and the price mechanism?
What are the requirements for the market and the price mechanismto function?
What are the economic characteristics of health care? Is health care different? Are
the conditions of perfect competition satisfied in the case of health care?
o Second, what are society's objectives? Are they considered or realised through the
functioning of the market?
o Third, what do the answers to these questions imply for the organisation of health
care services?
3.4 Markets and the Price Mechanism
In this sub-topic, we look at the general background of the markets for health care. We explore
the various questions considered in analyzing health care markets.
- What is a market? What do markets do? How do they work? The features of markets are usually
described in relation to consumer choice and producer competition:
"A market economy may be defined as an economic system in which the
mechanism of variable prices functions freely to signal consumer preferences and,
through its effect of profitability, to encourage the allocation of resources -
manpower, capital and raw materials - so as to satisfy those preferences. The
consumer exercises choice by voting with his purse. It is an impersonal system
which permits decentralised initiative in the use of resources; this in turn promotes
competition and efficiency while maximising the range of consumer choice."
(Centre for Policy Studies, Why Britain needs a social market economy, Barry
Rose, Chichester 1975.)
- A central feature of the market is the price mechanism.
3
MARKETS AND MARKET FAILURE IN HEALTH AND HEALTH CARE
3.1 INTRODUCTION
In this topic, we discuss market and price mechanism, theory of perfect competition, market
failure, main types of market failure, causes of market failure, and the role of government in
provision of health care.
3.2 TOPIC OBJECTIVE
At the end of this lecture you should be able to:
Define market and market failure
Discuss the main types of market failure
Explain the role of government in provision of health care.
3.3 Background
In this sub-topic, we look at the general background of the markets for health care. We explore
the various questions considered in analyzing health care markets.
- "Is health care in some way fundamentally different from food, clothes or any other
commodity which is distributed through the market? Are there special characteristics
1
, distinguishing medical care from these other goods? Why should society's objectives be better
achieved by non-market provision?" (Le Grand and Robinson 1976 pp. 32-33).
- These questions are typical of those that are frequently raised in the debate on the nature of the
commodity 'health' and the most appropriate organizational context for its optimal production,
allocation and delivery.
- They reflect the two aspects of the debate:
o First, technical arguments about the functioning of the health care market; and
o Second, more fundamental arguments about the nature of society's objectives.
- The second concern more basic issues because only when society's objectives are established
can 'optimal production, allocation and delivery' be defined and understood.
- However, the current debate focuses around the technical issues. For example, there are those
who argue that health care is not different and can be allocated via market mechanisms in the
same way as other goods and services.
- On the other hand, there are those who argue that health care is in some ways different, and
requires the modification or replacement of market mechanisms.
- This focus reflects the establishment of efficiency as the central societal objective and the
understanding of 'optimal' as 'most efficient'.
- However, a second important objective is that of equity, which is still a central policy objective
within many government health care systems.
- It remains important for practical policy-making, therefore, to consider whether, and to what
extent, the operation of the health care market achieves equity.
- The changing balance between equity and efficiency as policy goals helps to explain why the
extent to which governments have intervened in the free operation of the health care market
varies from country to country and has changed over time within countries.
- In considering these issues three groups of questions will be addressed in this topic.
2
, o First, technical issues: what is the rationale for the market and the price mechanism?
What are the requirements for the market and the price mechanismto function?
What are the economic characteristics of health care? Is health care different? Are
the conditions of perfect competition satisfied in the case of health care?
o Second, what are society's objectives? Are they considered or realised through the
functioning of the market?
o Third, what do the answers to these questions imply for the organisation of health
care services?
3.4 Markets and the Price Mechanism
In this sub-topic, we look at the general background of the markets for health care. We explore
the various questions considered in analyzing health care markets.
- What is a market? What do markets do? How do they work? The features of markets are usually
described in relation to consumer choice and producer competition:
"A market economy may be defined as an economic system in which the
mechanism of variable prices functions freely to signal consumer preferences and,
through its effect of profitability, to encourage the allocation of resources -
manpower, capital and raw materials - so as to satisfy those preferences. The
consumer exercises choice by voting with his purse. It is an impersonal system
which permits decentralised initiative in the use of resources; this in turn promotes
competition and efficiency while maximising the range of consumer choice."
(Centre for Policy Studies, Why Britain needs a social market economy, Barry
Rose, Chichester 1975.)
- A central feature of the market is the price mechanism.
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