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What are the distinctive features of healthcare? How do they affect the way in which it would be provided without gov? the problems of gov providing it in a cost effective and equitable manner.

How would you evaluate the effectiveness of the internal market in the UK NHS?



The aim of everything: to maximise welfare, efficiency and equality combination.

Standard goods when produced in private markets maximise welfare in Rawls and Pareto sense. I will not go into the estetics of welfare. Why markets are good for things that satisfy standard assumptions. Invisible hand. Perfect competitions: price taking, equal power. Complete markets: no public goods, uninsurable risks, complete capital markers with futures, effects of some missing markets to complimentary markets. No externalities, increasing returns (natural monopoly). Perfect information, assymetries, quality, price of commodity, future. Curve is well defined. Invisible hand provides that markets allocate efficiently. Nothing is said about equality.


Distinction from standard markets arises when these conditions are not satisfyed:

No perfect information. When available highly technical.  Not like consumer magaziens. Arrow.

People are unknowingly ill.

Treatment not repeated, so knowledge of little use.

Thus rational individuals economise on information.


Mistaken choice is very costly.

When there is medical need you do not have time to shop around.


Information creates power, so not equal access (rich being clever)

No information about prices, how much the treatment should cost.

No knowledge of the future. Insurance will not do for some chronic diseases unless insured before birth. Genetic tests

Asymetric information: moral hazard, adverse selection

Insurance problems – over prescription as individuals do not face MC and doctors as well.

Doctors not profit maximisers, but maximise others thinking. Glamorous treatment.


Standard public good assumptions – once universal hard to exclude and extra individual costs very little. This is for vaccination.

It is a merit good. Individuals normally consume too little, because of externalities to others and future uncertainty.


Also there can be distinction with other public/merit goods:

Politically benefits in kind more feasible.


How without gov

Withoug gov on private markets.

No perf information – not efficient. Allocation will not be optimal. Some things that are easily understood will be provided. But generally not clear whether under/overproduced or the extent.

Leads to inequality – rich more informed

Some people would die because they cant insure themselves, and do not have money. Another matter is about its implication. On ethical grounds this should not be allowed. However, ethics can be forced upon most people by the few at the top, and change very gradually. Thus it could be optimal.

Assymetric information causes firstly adverse selection. Only bad individuals will be insured. However, private markets can partially overcome this problems (in USA HMO-s on the second floor).

Once you are insured there is moral hazard. You do not take care of yourself, or if something happens require most expensive treatment. Again can be specifyed in the contract (minimum pay, and part payed). Moral hazard by doctors –third party payment problem, solution is HMO- internalise the externality.

But the whole issue of insurance assumes that people do want to insure, because they are risk averse. Without insurance one saves lots of admin costs, and assuming that most people have the money required for treatment, they will be treated. Others die. Again ethical question.

Monopoly problems – price of healthcare will be rised and consumption too small.

Externality – too little provided for vaccination, small today, subsidies. However, caring externality.


Equaltiy – no equality issues considered. However, alturism. But free rider problem for donations. Still personal families that contributed.


How gov can alleviate and problems

As markets fail so do governments. If the act on selfish motives, public choice theory.

Information – regulate, set minimum standards, monopolies not abused.

Problems –inflexible, government must understand, political motives  and pressure groups.


Government insurance compulsory. Forces everyone, elliminates adverse selection. Also consumption is free at the point, thus elliminates income effects.

Third party payment and moral hazard remains. Government is less flexible to deal with them.


Admin costs less for central government. But not as much discriminating between.

Externality elliminated by incentives for doctors to vaccinate. Calculation is problematic, otherwise no problems.


Equality considered and taken into account. Benefits in kind more politically correct. Very hard to define the tradeoff between equality and efficiency. Optimal taxation.


Government production – not spontaneous order, information not left to the guy on the spot. Creates inefficiency. Elliminated by the quasy internal markets.


Once governemnt is in it tends to grow too large.


Internal market effectiveness in the UK

Effectiveness is getting the things to users most cheaply. Internal market can be valued against other systems or absolutely. However, No equality.

Absolutely effectiveness.

Effectiveness can be valued by cost-benefit, cost-effectiveness or cost-utility. None tell about the total amount, which can be approximated by the amount people would be willing to pay for not to die (probabilities). Or the total value of future income, very imperfect, leave out.


Also cost-benefit and cost-effectiveness are very hard to value for various reasons. So I will look at QUALLYS to see the internal efficiency.


Other systems

Internationally – life expectancy, % of GDP.

However, these measures do not show if someone is in the queue etc. One can ask people, but they might not know.



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