Market Failure & Perfect Competition

• Market Failure is when healthcare markets don't allocate resources efficiently.
• Economic analysis involves deciding what healthcare to produce (allocation efficiency), how to produce it (technical efficiency), and who should receive it (equity).
• When healthcare is bought and sold in competitive markets, market forces can resolve mismatches between demand and supply.
• Shortages drive prices up and unsold goods results in falling prices.
• Key questions include whether private healthcare markets are competitive, if they allocate resources efficiently, and if governments should intervene.

Perfect Competition

• This matters because of Pareto optimally/efficiency.

Pareto Efficiency

• This is a central economic concept; a situation where it's impossible to improve one person's situation without worsening someone else's.
• Pareto efficiency is important in order to avoid inefficiency.
• It is an agreement to do something that could be done in order to improve at least one person's life while hurting nobody.
• Pareto efficiency is mainly about efficiency in resource usage, not equity.

Golden Ball Game

• This game involves contestants deciding to "split" or "steal" to divide a jackpot.
• If both split, the jackpot is split equally; if one splits and the other steals, the stealer gets all the money.
• If both steal, both get nothing.

Perfect Competition & Social Efficiency

• Perfect competition generates a socially efficient allocation of resources, resulting in maximum welfare surplus.
• Pareto Improvement: A change to the health system benefits some without harming others.
• Pareto Optimal: All Pareto improvements are made; no one can be made better off without making someone else worse off, which defines economic and social efficiency.

Imperfect Competition

• Healthcare markets often exhibit imperfect competition.
• This is due to having a small number of sellers, restricted freedom of market entry/exit, product heterogeneity, and imperfect knowledge.
• Imperfect competition results in a market failure to allocate efficiently, leading to under-provision of healthcare.
• Market failure is the same as being Pareto Inefficiency.

Market Failure in Healthcare

• Healthcare markets rarely achieve Pareto optimality, leading to distortions in prices, quantities, and social inefficiency.
• Main causes include market power, information asymmetry, externalities, and public goods.

Health and Externalities

• Health is contagious unlike factors such as height or appearance. Therefore, your health is dependent on the health of those around you.
• Health has many economic externalities (both positive and negative).
• Without these, efficient outcomes are reached but with them, government intervention may help the market reach a socially desirable state (e.g. Ebola quarantines).
• Externalities in Health: Any positive or negative effect from a market transaction that impacts a third party.
• Examples: Second-hand smoke, catching diseases from others, benefits of active living, and taxes for sick people.

Private vs. Social Welfare

• Private Welfare: The utility level of an individual within a society.
  • This shows the individual benefits or costs.
• Social Welfare: The combined utility levels of all individuals in a society.
• This shows social benefits or costs.

Herd Immunity

• Each vaccination protects both the recipient and neighbors.
• Unvaccinated people benefit when others become immune through vaccination, this is known as herd immunity.
• Herd immunity is a positive externality, since the social gain is greater than the private gain.
• When deciding whether to get vaccinated, the private gains from vaccination must be balanced against the private costs.
• The social benefits of herd immunity is not considered when deciding so a private market produces fewer vaccinations than socially optimal.

Arising from Production and Consumption

• A pharmaceutical firm dumps waste in a river, affecting downstream medical supplies firm's production but the firm's research benefits other pharmaceutical firms by improving scientific knowledge.
• Smoke from a hospital incinerator affects local people's enjoyment of their gardens, but the firm's research enables people to have information about their health.
• Consuming cigarettes and alcohol affects passive smokers and causes antisocial behaviour but vaccines benefit others by reducing the chances of illness.
• If the market served is very large, then it has greater costs, however it ensures people have access to home care which reduces travel time for home help.

Caring Externalities

• Consumption externalities are sometimes referred to as "selfish externalities".
• Jacobsson et al. (2005) studied how "caring externalities" can be an altruistic external benefit for health care consumption.
• The utility of person i, U₁, equals U(C₁, H₁, H2, ..., Hn) with healthcare as a factor.
• Studies examined willingness to pay (WTP) for a cure from six ill-health states, where caring externalities were based on improvements to others, especially in rare diseases.

Public Goods

• These have two key characteristics:
• Non-rivalry: Consumption by one person doesn't reduce availability for others.
• Non-excludability: It's impossible to prevent others from enjoying the good.
• An examples is benefiting from a street light doesn't reduce the available electricity for others, but eating an apple does.
• Another example is when national defense is available to all members of a country, whether they contributed to taxes or service.

Free Rider Problem

• Is when people have an incentive to use a good without paying towards the cost.

Public Good & Market Failure

• Goods with non-rivalry and non-excludability will not be provided in a private market due to lack of incentive.
• Will cause Free Rider Problem which will prevent the good from being available, and cause social inefficiency.
• The solution to this is the Government provides them (national defense) and compel people to finance this provision via taxation. Public goods are not the same as publicly provided goods.

Government Intervention

• Governments intervene because healthcare markets fail to achieve Pareto efficiency and can be inequitable, requiring healthcare based on need, not ability to pay.

Policy Instruments

• Examples include direct government involvement in healthcare finance and provision, taxes and subsidies, regulation, and information provision.
• Direct financial provision includes public hospitals and outpatient clinics, as well as health insurance, vouchers, grants, and public-private partnerships such as GOPC PPP.
• Taxes on things such as smoking helps achieve certain health goals (however, for certain consumption such intervene might not be efficient due to an inelastic demand curve).

Regulation

• Regulation: Governments influence the allocation of resources in the health market by establishing rules and regulations.
• This includes price-setting.
• Increased competition drives lower prices, higher efficiencies and greater responsiveness to consumers, but healthcare is still price-inelastic.
• This encourages pressure to fill beds through questionable admissions.
• This leads to ununproductive and costly medical arms race, through the duplication of expensive equipment and spending to attract patients.
• Barriers to entry include regulatory restrictions on Licensing to practice and Patents for medical products (e.g. drugs).

Provision of Information

• Governments helps correct imperfect knowledge through provision of information.
• An example includes provision of information includes benefits of vaccination and prevention of diseases.
• The theory of second best says that if Pareto efficiency is achieved in health care, then a first-best allocation of health care resources has been achieved.
• The question is how to achieve a second-best resource allocation in the context of market failure.

Government Failure

• Reducing monopoly more firms producing this drug more pollution bigger negative externalities. This means not to stive for solely perfect competition.
• Government intervention is needed in the market of health care, however such intervention it is not always unambiguously a good thing.
• A good government's intervention should improve 1) efficiency, 2) equity, 3) wealth but according to Arrow's "impossibility theory", which is impossible to fulfill all 3.
• Government generally has lack of knowledge of the market.
• Public provision may be inefficient compared to private provision, due to excessive administration, lack of market incentives, lack of threat of bankruptcy, difficulties in measuring performance, and conflicting objectives.