Health Goods, Market Failure and Justice

Abstract

The allocation of health goods frequently deviates from the principles of a market economy. This holds true particularly of medical services, even in Western industrialized countries, which claim to be market economies. In general, neither the decision to offer a medical service (e.g., an appendectomy) nor the decision to demand that service are made by sovereign individuals or firms who bear the full financial consequences of their choices.Moreover, the pricemechanismis not permitted to coordinate choices in health care by signaling varying degrees of scarcity. The decisionmaking process is thus completely different from that characterizing the production and purchase of refrigerators, for example. The United Kingdom and Italy, for example, have tax-financed national health services with permanently employed physicians who provide their services to patients free of charge. In other countries, social health insurance covers all or at least the majority of citizens, who often do not have a choice of insurer. In addition, benefits are usually laid down by law, while the prices of medical services are regulated by fee schedules enforced by public authorities. These deviations from market allocation are generally justified by claiming that health goods present particular features rendering them different from other goods. These features are said to cause a ‘market failure’, i.e., to result in an equilibrium that does not correspond to a Pareto-optimal allocation in non-regulated markets. In addition, equity concerns provide a reason to reject the market mechanism.