Saturday, August 27, 2005

One effect of health care prices

Mark Pauly points out (pg. 3-4) that if market structure is the determining factor, then you either have monopoly in the U.S. or monopsony in Europe as the explanation. In both these cases, prices differ from their "true" costs. Under monopoly, prices are higher than their true costs; under monopsony, the opposite. Under monopoly, then, people consume "too little" health care: if prices reflected costs, then they would have consumed more. Under monopsony people consume "too much" health care.

This explains a slight puzzle you can create if you work hard enough. Health care is a "normal" good: more income means you consume more (which is true: Americans spends a greater percentage of income on health care) . Prices are higher in the United States than in Europe. People consume approximately equivalent amounts of health care (despite spending more money on it in the U.S.). This poses a question: why, if America is richer, does it consume equivalent amounts of health care care? But because of market structure, America is consuming "less" than it should and Europe is consuming "more" than it should. Thus, we end up at approximately the same level of consumption, despite income differences.

Next question: once you decide that the health care sectors are producing approximately the same amount of "real" product and adjust GDP accordingly, what happens to the idea that America is far richer than everyone else?

2 Comments:

Blogger henry said...

Next question: once you decide that the health care sectors are producing approximately the same amount of "real" product and adjust GDP accordingly, what happens to the idea that America is far richer than everyone else?

I suspect PPP numbers take this into account.

Okay, I'm a bit more convinced than I was. Now, why is a national health care system necessary? Why not piecemeal reforms that reduce prices?

If health care is really a monopoly, you could subsidize it. I suspect we do a lot of that already. Hmmm...

5:18 PM  
Anonymous Blue Cross of California said...

Great blog I hope we can work to build a better health care system. Health insurance is a major aspect to many.

9:01 PM  

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