MeanMrMustard,
Thank-you for your congratulations… I’m not looking forward to the sleep deprivation…
Thank-you, also, for your excellent post. It is certainly working my faculties.
Ha, I think you caught yourself there. I don’t think I pointed that out, and if I did, it was by accident. What I was going for in reference to your comment: “Food DOES normally conform to law of demand.” It left me thinking what you thought “normally” meant? And why “normally” doesn’t apply to healthcare?
That is why I mentioned that I had equivocated between a specific item and the category. I’m going to clarify that statement to get at what I mean. Food items normally do conform to the law of demand. Many healthcare items and many healthcare services do not. What do I mean by normally? Normally means absence a general famine. When there is not a famine the substitution effect takes over and reduces quantity. Tomatoes are too expensive so I buy apples. In many, but not all, cases the substitution effect is largely absent from healthcare items and services. If a bone marrow transplant is needed I cannot choose a hip replacement instead.
Why is the price of healthcare so high? Is it really the case that it is a special market, or does it just look that way if you ignore the government’s involvement?
It really is a special market. Many items and many services have highly inflexible demand and are not subject to the substitution effect. I’m not going to try to argue all the factors of why it is so high… I’m nowhere near knowledgeable enough to engage that debate. I’m arguing, though, that it is a special market. Government involvement can have favorable or unfavorable effects on the allocation of services, on pricing, and on quality of delivery. However, government involvement does not change the fundamentals I’m referring to. It can be a countervailing force, however.
The only situation I can think of where demand is highly inelastic (not even perfectly, just highly) is where there is a monopoly on a good or service. Like my previous illustration: the well owner has the monopoly.
Upon reading and rereading your post, I think that after giving an excellent explanation of inelastic demand you then fail to use it correctly. When economists routinely write about inelastic demand they are referring, as you noted, to “where the demand doesn’t change so much in relation to price.” Inelasticity of demand has an effect on market fundamentals and it doesn’t have to approach perfect inelasticity for this effect to be dramatic.
I agree that a monopoly distorts the market effect, of course, as you note in your illustration of the desert town. (A strange town legislature that would grant a monopoly to an essential service but fail to regulate it). It is convenient to your argument that the desert town suffered a monopoly due to government interference. However, it does not have to be so. Let’s take this same town with no government interfering in the control and distribution of the water supply. An individual puts the capital into digging the well. He then creates the distribution network to deliver the water. He has a natural monopoly due to being first to market and to the high barrier to entry for any competitor. It is not perfectly inelastic at any price point as people would, at extreme prices, take tankers to other towns, walk miles to get water, etc. Nevertheless, the market forces are distorted because there are no easy substitutes, the demand is highly inelastic. After all, in the free market this entrepreneur should and will charge what he or she can.
Now, I’m not creating a straw man here, I know you weren’t arguing that monopolies are only caused by governments. I merely wanted to illustrate where government interference is required in a market distorted by highly inelastic demand. (Note: we should not confuse inelastic demand and inelastic need. It does not have to be a need, as in our discussion, to distort the market)
Your monopoly illustration is analogous, as you suggest, to drug companies with patents on life saving medicine. (Side point: monopolies cause price distortions which cost the consumer more. However a monopsony can reduce prices as is widely seen in state run healthcare.)
But, all of this is beside the point. The inelasticity of the demand (quantity) presents a strong resistance to natural free market forces. It does not require a monopoly and does not require a lack of supplier choice for a given service or item. What is requires is a poor elasticity in the QUANTITY demanded despite any given price for a specific service or item. This is where I believe you err: “I would say you are right only because government subsidies necessarily discourage people from the activities that would make it elastic.” I agree that government subsidies discourage people from making sensible market driven decisions about healthcare which further compound the problem. Your story about your wife’s need is illustrative of the value of deductibles and copays in helping shape efficient consumer behavior. We are not as far apart as you might think.
However, although you made a smart price decision your wife’s demand was highly inelastic. At the end of the day, the demand was still 1. You had a choice of suppliers and a choice of prices. That did not mean you had elastic demand. Of course, given an inelastic demand you will still make a smart price choice. But, the quantity was not affected. You were not able to say, well, at that price I will just get a drug instead (see, I’ve learned about the restrictions on drugs for pregnant ladies!). I believe you are mistaking consumer choice in a given buying situation among prices and suppliers with the demand itself.
The central question is not whether we can ensure that there are market forces at play to ensure consumers make better price decisions (I believe the ACA encourages copays and deductibles???) but whether the market is special because, as I claim, it is subject to highly inelastic demand.
Inelastic demand is an effect even when there are choices of suppliers and prices. If you did not find a less pricy chiropractic service, in fact, if you found that all the others were 10% HIGHER you would go back to that practice and get the procedure. The sticker shock would be the same. Your power to negotiate a better price for the product would not be.
Market prices also drive the input costs. At the macro level, I believe the demand elasticity has a particularly strong effect on highly specialized inputs. I can’t pay my employees too much or the market will not bear the cost of our services. However, if the market was less elastic I could. I need my specialized team and so do my competitors. Wage costs could go up until this class of specialized folks were paid the most the market can bear. That occurs in efficient market dynamics too, but in a market distorted by inelastic demand for a highly specialized service (skill) or product that ceiling is much higher. It illustrates why the free market is not enough to produce efficient pricing when the forces are out of balance.
In fact, the more socialized you get, the more the price from the providers will rise - UNLESS you price fix by law and ration care.
I disagree. You might want to say “unless you price fix by law OR ration care”.… Even still, those nations with the most socialized healthcare frequently provide better outcomes for less cost per patient (or by GDP) than the US. Monopsonies are highly effective against natural monopolies and are also a counter weight to inelastic demand (IMHO).
My question is why? You can see the cause and effect, and you can see it will cause a glut in services and an increase in price. The last thing we want then is price fixing, which will mean shortages. When that occurs, as I stated in the first post, everyone will be covered, but not cared for. Where is the moral thrust in that?
I think you made a mistake there. A glut of services will cause a decrease in price. I think you meant that price fixing causes a decrease in services. We have seen this in Canada where some specialists move to the US where they can make more money and operate with greater freedom. Your point is valid. It is a good argument against a single “invisible” payer. I take your point. However, I counter that the argument that prices will naturally fall in a free market is incorrect due to the forces discussed above. In multi-decade live examples in country after country central price negotiations and fee schedules have NOT lead to poor outcomes.
The moral argument is that when there is scarcity of supply of something critical to live and limb the market is not a suitable moral arbiter for the allocation of products and services. It works for ipods not for heart transplants. I argue that morally, those with more money should not be the first entitled to healthcare. Of course, wealthy baby boomers will get plenty of hip replacements in a market driven system. However, the underprivileged child will not necessarily receive the needed treatment. I believe the moral duty is to remove "not" from that last sentence and it takes collective action to make that possible.
DogGone does not have all the answers. But, would you agree that this is a special market? Maybe, you do not like the options of a single payer, single insurer, individual mandate, etc; However, do you still feel the free market, absent government interference, will lead to reduced prices for items and services across the board in healthcare the way it does in fast food and home electronics?
