‘Health care is provided by a single payer — the British government — and is funded by the taxpayer. All appointments and treatments are free to the patient (though paid for through taxes), as are almost all prescription drugs.’

Source: Is Britain's Health-Care System Really That Bad?, Time Magazine, 18 Aug 2009

Explain the economic rationale for free healthcare and assess whether this is the best policy.                 [25]

Introduction

Market failure refers to a situation whereby the free market, in the absence of government intervention, fails to allocate resources efficiently, resulting in societal welfare not being maximised.The production and consumption of healthcare produces positive externalities that are benefits enjoyed by 3rdparties not directly involved in the production of consumption of a good or service, of which these benefits are unaccounted for in the free market.

Healthcare and Market Failure

Economic Rationale for Provision of Healthcare for Free                   

Figure 39a: Positive Externalities in the Market for Healthcare

Marginal private benefits enjoyed by individuals would be the benefits associated with good health.
Marginal private costs to individuals include the money paid when he or she visits the GP or cost of seeking treatment
Marginal external benefit are positive externalities generated which includes the reduced work disruption as workers do not take sick leave or recover faster; co-workers are also less prone to illnesses – improving the overall productivity of a company. Collectively, this benefit extends throughout society and is immense.

The presence of external benefits means that there is a divergence between marginal social benefit and marginal private benefit.

With reference to figure 39a, which shows the market for healthcare services

• Free market output would be at Qm where MPC=MPB, since consumers would only consider their own private costs and benefits when choosing to consume and not the external benefits

• Socially desirable level of output is at Qs where MSC=MSB.

• Since Qs>Qm, underconsumption of healthcare services occurs and deadweight loss of area ABC is generated

• Due to allocative inefficiency, market failure exists in the market for healthcare services

The UK government therefore provides healthcare for free since the provision of free healthcare decreases the monetary cost of healthcare to zero and will encourage greater consumption. 

Evaluating government measure and alternative policies

Free Healthcare                                                                  

Figure 39b: Free Provision of Healthcare Services

When the government provides free healthcare, they fully absorb the costs of healthcare. Healthcare providers do not face any costs in theory and this will result in free healthcare for consumers. With reference to figure 39b, which shows the market for healthcare services

• The cost curve would shifts from MPC=MSC0 to MPC=MSC1, where price is zero and level of output is maximised 

• Quantity of healthcare services consumed would increase from Qm to Q0

This will remove the problem of underconsumption. In addition, free provision of healthcare also helps address the problem of underconsumption due to income inequity, where the poor may not be able to afford basic healthcare. In the case of free provision, this problem is eliminated. However, a problem of overconsumption may occur since Q0 can be greater than Qs. As such inefficiency in the market still occurs as resources are dedicated to the production of healthcare at a level above the socially optimal.

The increase in the quantity of healthcare services may possibly compromise the quality of the same services

This is especially the case when there exist increased waiting times for treatment at healthcare facilities. Prompt treatment to people who have urgent need for attention will be delayed.

More doctors will be required to be trained as well – competencies may not be as high as the level desired.

Comparing to countries like Singapore whereby the spending on healthcare is significantly lower, the healthcare outcomes are actually better – Singapore has a higher life expectancy, survival from illnesses rate and lower infant mortality rate. Free provision may hence not be the best policy.

Alternative Policies

1.      The government can look towards the subsidisation of healthcare instead of free provision.

2.      The subsidy can be equivalent to the MEB.

3.      This would solve market failure.

4.      However, the MEB is often difficult to quantify and an incorrect amountof subsidy would still lead to an inefficient outcome.

5.      Furthermore, there exists the question of whether to provide the same subsidy throughout healthcare.

Conclusion

Basic healthcare can be provided for free to ensure it is within reach to all. The UK government can provide subsidies to ensure its affordability – means testing can be done as in the case of Singapore. If the UK government is able to combat the imperfect information issue of quantifying the MEB, subsidies would be a better policy compared to free provision.

Comments

In general, I would largely disagree that any form of merit goods should be provided for free if it can be provided by the free market. An overconsumption problem can be as problematic as an underconsumption problem. If resources are still allocated inefficiently, government intervention may not lead to a better outcome.