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Would you characterize my inability to get from NY to London via airplane in 1886 a market failure? You might. After all, we had markets at that time, and the market did not “deliver” the goods. But that is no reason to call it a market failure. Why? Well, we had governments at that time, and they did not “deliver” that good either. And it would be wrong to say the government failed too. There was no market failure in 1886 because the costs of producing and delivering safe air travel far exceeded the potential benefits from it at that time. The existence of these costs is unfortunate, but it is no reason to say the market failed.

In what sense, then, can one make the claim that there are market failures in today’s health insurance industry? A good claim would have to argue that there are lots of people who value health insurance services more than it costs to provide those services, but for some reason they are prevented from acquiring them. In other words, given our current stock of knowledge and resources and people’s preferences, value creating transactions are possible, but something is preventing them from happening. But this does not (yet) mean the market has failed. Why? Well, we’d have to observe an actual market and its outcomes to see if that is the case. Of course, we have nothing resembling a market in health insurance today, and so we may never be able to settle this one.

I understand that such reasoning is unsatisfying. It’s sort of like the Communist sympathizers arguing that real communism was never tried. But one can indeed point very clearly to the prohibition on interstate insurance purchases, laws such as guaranteed issue, laws such as community rating, laws mandating particular coverages and laws providing favorable tax treatment to particular kinds of insurers over others as pretty intrusive.

The final point I’d like to make today is to suppose that someone else delivered health insurance to Americans, say the VA. In that case, would we automatically assume that everyone gets it? Perhaps nominally. Or imagine that churches provide health insurance or mutual aid societies provide health insurance and that some people who value it nonethless cannot secure it, even if the costs are lower than their values. Would those constitute market failures?

4 Responses to “Rethinking Market Failure”

  1. Rod says:

    Back in the 1980’s, I was the one in our business whose responsibility it was to deal with health insurance, so I set out on a quest to find a policy that would have a substantial saving in premiums in exchange for high deductibles, which we would pay for our employees so that they would have, in effect, the same coverage as our “Cadillac” fee-for-service plan that we had been accustomed to.

    Because many of our small company’s employees had health problems, we had to rule out of hand any non-Blue Cross plan, and we were stuck with the options offered to us under Blue Cross, which was, in effect, the insurer of last resort. None of the plans offered more than a trivial saving of premiums in exchange for high deductibles.

    The reason for such a narrow set of choices? State insurance regulation. The sales people from Blue Cross said their hands were tied. And one of the regulations was that Pennsylvania prohibited me from going to another state for coverage.

  2. Harry says:

    Market failure in my reading is a relatively recent buzzword, but I guess its pedigree goes all the way back to Marx. Wintercow no doubt knows a lot more of this controversity. My recollection of the term is that it grew up in the 70’s along with critical legal studies and critical English studies, all of which were foreign subjects to one who got a liberal education. While it may be unfair, the reason why I ignored all of this stuff was because I thought the academic world was manufacturing a Wittgenstenian overlay of B.S. to complicate the subject; yes, I did think they wanted to further their agenda, and get more pay as tenured teachers, as opposed to Professors, who by a former definition were professionals, like medical doctors.

    Market failure never entered my mind until recently. I think I thought about it before I met Rizzo, who has raised the subject several times, asking whether there is such an animal.

    That is a great question.

  3. Harry says:

    Suppose I put in an order to buy three hundred million shares of ExxonMobil, at the market, with my broker. I tell my broker I have a friend Jaime Goerlick has guaranteed the loan in my margin account. The broker, hungry for a multimillion dollar commission, goes to his computer, clicks a few keys, and finds that there are a million shares offered at $86.226785 per share, executes the order, and buys a Porsche.

    He goes back to his computer, and finds none offered at 86, and ten thousand offered at 88. He calls his friend, who knows people. Maybe they own 500,000 shares. He makes a call to Fidelity: would they sell thirty million shares. The manager says he will get back. By four-thirty the big deal is dead. There will be other deals tomorrow. and from the parties involved, that is the most important fact.

    A sociology professor seeing this wonders jealously about how come he did not get into all this action; the professors in the business school make notes.

    But the trade was never completed. No big fishes were willing to sell their shares at the prices offered.

    Is this a market failure, according to whom?

    To me, a market failure is an oxymoron. I shake hands to sell with my counterpart and sell fifteen young winterheifers, the buyer shows up with the truck, the money gets handed over before the winterheifers get loaded on the truck, and there is no government agent standing in the barnyard to referee the transaction. Whether either party got the better deal, that is my business, if I own the winterheifers.

    Now, the agricultural economists at the
    USDA, and the moralists in congress wish they could get involved in this transaction to ensure it does not make an unfair situation. After all, what if the Amish farmer took advantage of the naive young seller on the other end, or vice versa? Surely they can advise each of us to arrive at a better price per winterheifer, where the answer fits their idea of social justice.

    So why do economics books dwell on the difference between monopolistic prices and Platonically pure prices? This to me old macro theory, fighting a war that ended long ago, and the analysis may be entirely wrong?

  4. Harry says:

    Wintercow must get frustrates when we do not answer his question, which is often leading. Of course there is not a market failure, if a such thing could occur. If everybody had to suffer paying for health insurance out of his or her own pockets, maybe they would have taken charge, and we would not be in our present mess, which includes a five dollar co-pay when you visit the doctor for your quarterly checkup, and check out at the desk where someone passes on the codes to the billing department, which is six people. What a screwed up system, all that overhead, including the reviewing industry that watches for improper coding. Meanwhile, our solons in Washington want to pay doctors and nurses less. Ok, the nurses get paid a living wage, a bit higher than the orderlies and the hospital maintenance crew, whatever the SEIU determines according to their doctrine of comparable worth.

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