Download merit good

Should UK health care be provided by
the government or private sector?
Tom Allen
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The case for government
provision of health care
•
Since the NHS was founded in 1948 it has been held that
health care should be ‘free at the point of delivery’ and
people should ‘pay in according to their means.’
There are three arguments for state e
intervention which will be examined in turn:
•
Merit goods are under-consumed in a free market.
•
The government can get the benefits of economies of scale
in health provision.
•
Private providers of health care may put profit before
patient care.
Merit goods are
under-consumed in
a free market 1
•
We start by assuming there is no NHS and health care is provided by
private practitioners, with demand and supply determining equilibrium price
and output.
•
We now look at a hypothetical free market for an inoculation against
influenza.
•
The marginal private benefit, MPB,
e
reflects the utility that a consumer
gains from consuming an extra unit of
health care. People like the elderly,
the very young and those with
underlying health problems would gain
a large MPB from a ‘flu jab’.
•
These consumers would be willing to
pay a high price for the jab and would
represent the upper portion of the
demand curve, D = MPB1.
Merit goods are
under-consumed in
a free market 2
•
Those consumers who feel they are less likely to catch flu
and may suffer less severe consequences from it are less
inclined to pay for the flu jab.
•
They represent the lower portion of the
demand curve, D = MPB1.
e
•
Supply of inoculations is directly linked
to price, and a higher price will result in
greater provision of the service, since a
greater profit can be made.
•
This results in a free market
equilibrium at A, with Q1 units
produced and consumed in a year
and a market price of £40.
Merit goods are
under-consumed in
a free market 3
•
Health care is a merit good and a defining feature of a merit good is a
potential failure of information on behalf of the consumer.
•
This could result from uncertainty about the probability of catching flu; the
degree of incapacity it might cause; and, the effectiveness of the inoculation.
•
Consumers often underestimate the
e
answers to these questions, therefore
underestimating their MPB, such that D
= MPB1 gives an under representation
of the true benefit from having the jab.
•
If consumers were fully informed,
demand would be higher at D =
MPB2, meaning the good is underconsumed in a free market by (Q2 –
Q1) – representing a market failure
and a misallocation of resources.
Merit goods are
under-consumed in
a free market 4
•
Merit goods also tend to be associated with positive externalities, which
are additional benefits to those not directly involved in the transaction.
•
Thus the marginal external benefit,
MXB, can be added to the MPB of the
consumer to give a Marginal Sociale
Benefit, MSB, which is the total
benefit gained by society from the
consumption of the good.
•
The consumer of the inoculation is
unwilling to pay for the MXB received
by a third party and so consumption
fails to reflect the full MSB, resulting in
overall under-consumption of (Q3 –
Q1), heightening market failure.
Merit goods are
under-consumed in
a free market 5
•
The government should therefore provide Q3 health care via the
taxation system to correct these market failures.
•
This should result in more resources
devoted to health care and
increased allocative efficiency. e
•
It should also help to redistribute
income and wealth from rich to
poor, as the rich pay more into
the system and many poorer
groups, such as the elderly, make
greater use of this ‘benefit in
kind’.
The government can get the
benefit of economies of scale
in health provision
•
This figure shows provision of health care by two providers where
average costs fall as the scale of production rises. Firm A, a small
private business, provides Q1 units per annum at an average cost of
C1.
•
Firm 2, the government, providese Q2
units at a lower average cost of C2
due to reduced borrowing costs and
increased buying power.
•
The government can thus produce at
lower unit cost, increasing the
economy’s productive efficiency and
increasing output per unit of input.
Private providers of health
care put profit before patient
care
•
The incentive for many private producers is to maximise profit.
•
This is done by charging high prices and cutting costs.
•
Critics of health care privatisation argue that patient care might be
compromised by attempts to cut ecosts.
•
Private producers might also refuse complex and expensive cases
leaving the NHS to treat these patients.
The case against state provision 1:
Diseconomies of scale arising from
universal health care provision
•
If the government is producing at Q3 on the previous diagram, it could
be incurring rising average costs due to diseconomies of scale.
•
There is some truth in this as the NHS is a huge organisation with
problems of co-ordination and poor communication.
•
e compared to the rest of the
NHS workers take more sick leave
economy, which may suggest low morale, although they are also
subject to more emotional stresses in dealing with sick people.
The case against state provision 2:
The minimum efficient scale for
health care provision is low.
•
There is less scope for economies of scale than in many other
industries.
•
Initial capital outlay is relatively low in some areas of health care.
•
Thus the average cost curve is shallow, and the minimum efficient scale
(the lowest output level at which ethe firm becomes productively efficient)
is a small percentage of industry output.
•
This implies that there is room for multiple, efficient practitioners in
areas such as dentistry, psychiatry and general practice and these
practitioners could come from the private sector.
The case against state provision 3:
Monopoly provision may lead
to x-inefficiency.
•
The NHS is a technical monopoly, providing over 90% of all UK health
care.
•
Economic theory would suggest that a profit-maximising monopolist
restricts supply and raises price.
•
This is not true of the NHS as it is not a for-profit organisation.
e
•
But, there is still a lack of competition in many areas.
•
This could lead to x-inefficiency coined by Harvey Leibenstein in 1966.
•
This is where areas such as ‘organisational slack’ and ‘motivational
inefficiency’ might allow a monopolist’s costs to drift upwards, but the
firm remains in business due to lack of competition.
The case against state provision 4:
The lack of price signals linking
producers and consumers
•
The price mechanism plays a vital role in the efficient allocation of
resources where a rising price signals that a product is in demand.
•
This causes the producer, whose incentive is to maximise profits, to
expand production and allocate more resources to the production of
this good.
e
Rising prices also signal to consumers, who are trying to maximise their
total utility from consumption, to ration their expenditure away from this
good to a rival product.
•
•
Such price signals are absent in the NHS since output is free at the
point of consumption.
•
Thus demand does not reflect marginal private benefit gained from
consumption and supply does not reflect the marginal private cost of
the producer, resulting in a misallocation of resources.
The case against state provision 5:
The problem of zero price provision
causes demand to outstrip supply
•
The demand for health care seems to be inexhaustible, yet resources
are finite.
•
State provision at zero price results in excess demand and
waiting lists.
•
The systems of rationing adoptede by government are not always
equitable or logical.
•
It would be better to have private provision with a positive price.
The best of both worlds?
•
Attempts have been made in recent years to combine the best features
of public and private provision in the NHS.
•
Internal markets were created by the Conservative government in the
early 1990s to split buyers of health care – often the GPs – from the
sellers of health care – such as pharmaceutical companies and NHS
hospitals. This caused both sidese to become more aware of costs and
resulted in efficiency gains.
•
Also, the Private Finance Initiative allowed private firms to tender for
contracts to build and maintain NHS buildings, thus opening up
competition. But many of these contracts have since been found to
provide poor value for money for taxpayers.
•
The Labour Government (1997-2010) expanded PFI and in 2011 the
Coalition government announced further decentralisation, putting
budgets in the hands of GPs and trying to cut bureaucracy.
Conclusions
•
The NHS will remain funded by the government.
•
But the move towards increased private provision and use of internal
markets will continue.
•
It looks as though both private and state owned hospitals will be able to
e marketing their services.
engage in price competition when
•
This again raises the question of whether profit might come at the
expense of patient care.