Why Government authorities Regulate The Health Care and attention Industry Economics Essay

In the first area of the essay we explain market failure and look at the model of perfect market, we then compare this with healthcare market and find out the complexities or factors that results in inability in the health care and attention market. In the next part we will look at the ways government authorities in four different countries have intervened to ensure that the sources of the market inability are corrected.

Market failing can defined as a situation whereby there's a failure to attain a competent allocation of resources within the market economy.

A important problem with the concept of market failing, as economists once in a while recognize, is the fact it describes a situation that exists everywhere (Nelson, 1987; Dahlman, 1979).

There will vary sorts of market that exist in the contemporary society with the perfect market and monopoly at the extremes and others among this spectrum.

Perfect Market

The perfect market model generally known as a perfect competition is the most important model since it serves a benchmark from which other kinds of market can be looked at. The main goal of any organization in the market is to increase profit and the price of the products and services are dependant on market forces. An ideal market is dependant on the following assumptions;

There is full information,

The deals are impersonal,

There are no obstacles to entry or leave,

There a wide range of buyer and retailers, plus they cannot influence the marketplace price,

The products are homogenous which means that the buyers cannot differentiate between products.

Finally the products are private goods.

Why is healthcare market different?

The first reason for this is the fact health care is a open public good which differs from a private good as observed in the perfect market model, general public good has two features, non-rivalrous which means that the use of computer by one individual will not stop another from benefitting from it, and it is non-excludable this means it'll difficult to prevent people from enjoying the huge benefits. With open public good there is what is known as a free-rider problem - people will not purchase them because others are willing to purchase them. The type of general public goods poses issues for the market because the private sector won't make a profit off their provision since everyone can appreciate it if they pay or not. Health care is also a open public good and under provision from it also leads to market failure. Health care is also a merit good that society values and believes that people must have them because consumption is believed to make positive externalities-this will be discussed in the next paragraph and also other causes of market inability.

Causes of market failure in health care

1. Externalities

Externalities generally known as third-party effects appear when others are damaged by the exchange arising from the production and intake of health care for which the expenses or benefits aren't considered. "The center of the debate against market failing analysis is derived from the analysis of deals. " (Zerbe et al p7). Whenever there is a purchase externalities are recognized to occur which brings about transaction costs. That is defined as "the resources essential to transfer, establish and maintain property rights". The house rights was developed by R H Coase where he stated that individuals form firms to lessen transfer costs. Externalities may occur in several ways plus they may be either positive (beneficial) or negative (dangerous), and can be during production or consumption. Types of negative externality is smoking which results in exterior costs on an authorized - unaggressive smoking and also alcoholic beverages ingestion can result in antisocial behavior. Vaccination against infectious diseases is a form of positive externality where a person is certain of coverage by the consumption of another person. An example of external cost of development is via pollution from a business and external advantages of development is the patent rights given to organization that discovered a new drug, stopping all the firms from copying the products. When there are externalities in health care this won't lead to a perfect market hence market failure will appear. The externalities discussed up to now can be known as selfishly motivated. You can find externality referred to as caring externality which occurs when individuals get personal satisfaction from understanding that one is getting the health care they need. Externalities are around us every day however they are not taken into account whenever there's a transaction, it is because property rights aren't well defined. Health care is not possessed by anyone then there is economic incentive to protect it and the only path the property privileges can be well identified and secured will be through federal government legislation e. g. by banning smoking in public areas and also making vaccinations compulsory. Even with government legislation it is difficult to achieve this. (Zerbe, 1976, 1980;Medema and Zerbe, 1999a), in a world where property protection under the law are fully specified and where exchange costs are zero, the allocation of resources will be efficient. This kind of world will not exist, this can be an indicator that market failing will always appear.

2. Imperfect information

"Economics can be involved with the productive use of limited profitable resources for the intended purpose of achieving the maximum satisfaction of our material desires" (Jackson and McConnell, 1985, p3), this involves transacting functions utilising these resources to meet and satisfy their wants. That is predicated on the assumption that the functions have full information about the products and services being bought or sold and also about one another. These assumptions identify market where there is perfect information (Stiglitz, 1993). In the health care there is certainly imperfect information and/or information asymmetry. Information asymmetry can be identified (using the acquisition of medical health insurance as a classical example) as situation whereby client that wants to get a medical health insurance has more descriptive information about himself than the insurance company. Imperfect information is the case of a physician who have more knowledge than patients. The uncertainty of condition and the price tag on it when it comes up is one the principal reasons for taking health insurance. Two problems happen whenever there may be insurance cover; these are unfavorable selection and moral threat. Information asymmetry and adverse selection was initially referred to by George Akerlof in his article, "The market for lemons: Quality, Uncertainty and the Market System. Adverse selection is often referred to as a concealed information problem in market, where for example vendors may know more in regards to a product when compared to a customer. (Estrin and Laidler). Through the 1980s, when HIV/Products was first observed insurance companies experienced adverse selection as a great deal on individuals with this disease had taken increased protection plans without disclosing their position. This led to the advice that genetic testing should be utilized for those who may wish to acquire health insurance. The idea moral hazard was initially identified by the French economist Dreze in 1961 (Mooney 1994, p 135), but it is described as a hidden action since it results in behavioural changes in patients once their expected losses are covered by medical health insurance. Ehrlich and Becker (1972) recognized between ex lover ante and ex lover post moral risk. The previous occur in a wholesome status when individuals can engage in preventive health care such as regular exercises and good eating habits and the latter when the average person is ill, but because the health whether it be taxation or other kinds of health insurance that allows a subsidise price or free at the point of use, there is a higher demand by the patient than it will be if the patient was to pay all the costs. Donaldson and Gerard (1993, p 31), remarks, "thus, the marketplace fails to transfer efficient price signals to consumers".

Donaldson and Gerrard (1993) identified two types of provider moral hazard. They identify moral risk by doctors who are identifiable actors in the health care system and also moral threat by clinics. Doctors are known to act with respect to the patients both as the demander and dealer of services and don't account for the cost. First on the supply side they will be the provider of healthcare and on the demand area there is certainly information asymmetry. There are different reimbursement which affects doctor's attitudes and two that affects the patient's behaviour ( charges to patients, private practice). Supplier moral threat occurs mostly with the fee-for-service (FFS) reimbursement - doctors are paid on the number of services; more services will lead to an increased income. Therefore there is a financial incentive for health professionals to provide care and attention in excess of the actual patients may require if they got full information. There is not much books on medical center moral hazard so this can be an area for future development.

3. Imperfect competition

The perfect market provide the best method of making sure that the market is effective by encouraging firms to compete and also creating choice. These conditions for efficiency help as a benchmark to help identify sources of allocative inefficiency known as 'market failures'. But in real life the perfect market does not are present as Hausman argued, "when used literally, the idea of market failing is of little relevance, because flawlessly competitive equilibrium, the standard against which market "fail", does not obtain. Not surprisingly the competitive market have been used on the assumptions on which it was produced, as Amelia Fletcher, Director of Marketplaces and Regulations Initiatives commented, 'Competition is a rivalrous process, in which firms be competitive effectively to give the consumers an improved package'. The question is that is this accessible in health care with the uncertainty that surrounds ill health? The first problem this is actually the limited information has about the final results and benefits associated with various medical treatments. Individuals seldom have the same disorder over time so you can find little chance to acquire information and even on those with long standing long-term disease like diabetes who may have information. The changing world of advanced technology means that you will see information disparities. Oligopoly is the prominent market model in health care and McPake and Normand (2008, p 141) observed, "the main element feature of your oligopoly is the fact that the decision created by one firm depends upon the decision made by other organizations, i. e. there is a high amount of interdependence between firms". Thus there may be incentives for clinics to collude which results in undesirable outcomes for the culture. It is generally accepted that competition works best when there is excess capacity, however in health care there is certainly unnecessary demand.

4. Inequality and poverty

An individual capacity to purchase healthcare depends after his income to a big magnitude. In standard monetary theory it is the ability and willingness to pay that determines how resources are maximally utilised but this does not happen in real life as we've noted from earlier sections in this article. Goodwin (2005) commented that, private hospitals make demand and other raw materials from suppliers with the expectation that the final products will be bought by consumers-the demand by consumers are those backed by the consumer's ability to pay. So what is important in a perfect market works well demand i. e. , there exists distribution of resources to meet up with the basic people needs. Therefore for example few prosperous people require a particular product and many poor people lack money to acquire basic health needs then the market will be stimulated to build those goods for the rich, hence the marketplace will are unsuccessful.

Government involvement and regulation of health care market

From our discourse it could be seen that involvement is necessary to counteract the causes of market inability as well as the results such as adverse selection and moral risk.

Boadway and Wildasin (1984, p 61) claim that, "while usually the remedy for market failing due to general public goods is for the public sector to supply the good, the solution for externalities is often to provide incentives to the private sector to produce the correct amount".

We will examined specific data from four countries: the uk (UK), the United States of America (USA), France and Finland to see the way they intervene and control their health care systems.

Methods of authorities intervention

1. Status provision

One of the primary ways of solving market failure is through general public funding of the health service. In the united kingdom, France and Finland private hospitals are funded through fees however in UK it is through standard taxation while France and Finland use a social insurance system. This technique ensures common coverage for the populace, inhibits exploitation of patients by monopoly of providers. The primary problem is the problem moral threat which is more common in publicly tax funded system in UK than the cultural insurance system of Finland and France. In the united kingdom the issue of moral hazard is controlled by using gatekeepers, ready lists, ready times. In France and Finland price system is utilized to deter moral threat. Compared to the USA where it is more of private insurance, co-payments, deductibles and medical savings account schemes have been used as ways of reducing moral threat. Donaldson and Gerard (1993, p 72) argued that, "even the US health care system recognises the shortcomings of a complete reliance upon market forces. The main form of authorities regulation you can find in the form of insurance techniques for seniors (Medicare) and indigent people (Medicaid)". However in the united states, adverse selection is quite typical and it also occurs in UK but to a lesser amount, but this is almost non-existent in the social insurance system (France and Finland).

2. Taxation and subsidies

Imperfections in the market business lead to inefficient allocation of resources and this contributes to negative or positive externalities. Taxation is employed to discourage certain behaviours like monopolising and overpricing and subsidies can help to reduce the cost of paying for merit goods like health care. Governments in every four countries for example in order to reduce the negative externalities caused by smoking released fees for the purchase for smoking and also legislate that companies should advertise the hazards of smoking on the load up of smoking sold. Antirust legislation are transferred in every four countries e. g. laws prohibiting the forming of monopolies and protecting against imperfect competition.

3. Regulation

Dolan and Olsen (2002), commented that there is constant pressure for much more spending generally in most health services across the world, therefore policy producers have to impose regulatory procedures on the providers of services to accomplish effective allocation of the resources. Legislation can be through price control, quality control e. t. c. Rules of pharmaceuticals is one area where the majority of government intervention occur, for example in the UK, the Country wide Institute of Clinical Brilliance(NICE) issues rules which drugs are approved and can also be used. Also places a ceiling how much the price should be but one main disadvantage is that it can exclude the utilization of new and effective treatment due to costs. In USA there may be the Food and Drug Administration (FDA) which also a regulatory body. In France there is the Agence Francaise de Securite Sanitaire des Produits de Sante (AFSSAPS), and in Finland the National Agency for Drugs.

4. Cost advantage analysis

Government intervention must look at the cost benefit examination, if the huge benefits are definitely more than the costs. Then the federal should collect taxes and provide the good.

Government failure

Government failure can occur when mechanisms devote place to enhance the market failure worsens the problem and business lead to inefficiency and inequity in the health care and attention and also create distortion. The next can cause government failing;

1. Inefficiency of Talk about provision

In all countries political self applied interest can result in inefficiency and aggravate the market inability already present because politicians can design policies to retain power alternatively than maximise efficiency. In France and Finland the taxation is usually higher and brings about more costs and in the UK the citizens have no idea how much is been used for healthcare and other industries of the overall economy.

2. Changes in federal government policies

In the USA insurance firms will get it difficult to plan without understanding of fees, subsidies e. t. c which will lead to inefficiency.

3. Free marketplaces usually causes better provision of healthcare(USA for example) which allows regulations of demand and offer to regulate how the market works

4. Lack of incentives

Undesirable bonuses usually create inefficiencies, for example in France where doctors are paid by salary in a few private hospitals this will lead to inefficiency.

5. Insufficient information

Government can lack information just as much as the marketplace because most times the government do not know very well what kind of health care the consumer really needs and this based on the information they may have and may not even know the entire costs/benefits of the policy.

6. Bureaucracy

Most times strategies of the government are usually troublesome and this slices across all the four countries. Governments respond more little by little to changes and also the time it requires from planning to implementation could cause policies to be ineffective.


Market failure may exist in every market economy and the health market is not an exception. It has been shown that there reasons why health care market might not exactly work efficiently, thereby necessitating government treatment. Healthcare is a general population good and coupled with the externalities and information gaps are factors behind market inability which requires correction but a sufficient justification for federal government intervention.

Intervention is known to be costly, so therefore for it to work a cost-benefit examination to suggest it is worthwhile needs to performed to avoid government failing which lead to market failure in itself.

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