The price mechanism in healthcare

The poster above, produced by the National Health Service, popped up in my Facebook feed recently. Just last week, a friend posted this

“Horrified by the ‘if it’s free why shouldn’t I take it’ attitude with regards to the minor ailments scheme. If everyone takes free plasters and calpol from the NHS then there is less money in the pot to pay nurses, treat brain tumours, strokes and dementia – ya know, the things that will kill you. Ultra liberal lefty that I am, I’m sick of seeing people grasping for freebies without thinking about the consequences. Here’s a good rule of thumb – if you’ve treated yourself to a packet of fags or a glass of wine this month, you can buy your own sodding calpol.”

One of the laws of economics is that, ceteris paribus, the lower the price of something the greater the demand for it will be, even if it might not be the demand the supplier intends to meet. If you offered me, for free, a DVD of Sheffield Wednesday winning the League Cup in 1991 I’d take it and enjoy smashing the thing. Several thousand Sheffield United fans, like me, would do the same.

But if I had to pay even 1p for the pleasure of smashing that DVD, I’d say ‘No thanks’. And the higher you raised that price the more people would say ‘No thanks’. At some price, even people who would actually want to watch the DVD would say ‘No thanks’. That’s how you get your downward sloping demand curve, shown below.

lt is doubtful that enough of something could be supplied to everyone with even the slightest demand for it. The resources that produce one thing cannot, after all, be used to produce another thing. Supply is constrained. What is needed is some way of matching these various states of demand with the actual supply – of making sure the League Cup final DVDs go to nostalgic Wednesday fans and not grumpy United fans like me. In a given period supply can be considered fixed, as represented by the vertical supply curve on the chart below.

sc

If, on the chart below, we hold the price below the market clearing price, p1, where quantity demanded meets quantity supplied (the curves above cross – the NHS effectively holds the price of British healthcare at zero), the quantity demanded rises, from q1 to q2

Untitled drawingBut, as the NHS and my friend are finding out, even though q2 of healthcare is being demanded, there is still only q1 of healthcare being supplied. How to match this supply to this demand?

Queuing is the most common answer. The person with severe chest pain in the NHS poster ought not to be in a queue, but with a price of healthcare set at effectively zero, that is exactly where he will be. Alternatively you can try and rely on people to ration themselves, as the the NHS and my friend are trying to encourage. And maybe it will work.

The essential point is that in a world of limited means with competing ends scarcity is real and cannot be wished or voted away. The laws of economics are a little more stubborn than that.

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