The method by which all resource allocation occurs in a completely free market is the price. Price determines how much of a good is provided, and how much of what is provided is purchased. Equilibrium is reached when the amount provided and the amount demanded is equivalent, and at this point social surplus - that is, the excess positive utility generated by all transactions occurring in that market - is maximized.
Seems pretty simple, doesn't it? It may even seem unassailable. However, this is not quite the truth. Let us take healthcare as an example.
The demand for healthcare fluctuates incredibly on a personal basis. I, for instance, have no desire for healthcare at the moment, as I am not sick and, in fact, feel pretty darn good. I might pay a small fee to have myself examined, but I am not willing to pay the somewhat exorbitant prices to visit a doctor when I have no reason to do so.
On the other hand, take someone who has just been hit by a bus and needs emergency medical attention as quickly as possible. This person would, presumably, be willing to pay a large sum of money to see a doctor immediately. In fact, many people would pay nearly any price they could match to ensure that they survived such an accident.
The overall demand curve for healthcare is, then, very interesting. When it is entirely free, many people demand it. The demand goes steadily down as you increase the price. Seems like a normal demand curve. So far, so good, right?
Not quite. When you reach towards higher and higher prices, you eventually reach a subset of individuals who, like our unfortunate friend underneath the bus, are willing to pay virtually any price to receive healthcare.
For those of you who are well-versed in supply and demand economics, this might seem a little odd, but it still seems like there's a possibility to fix the problem and reach an equilibrium price that maximizes social surplus, right?
This isn't quite true. You see, for the individual who requires healthcare now, the market contains a monopoly - they need that healthcare, and only providers within a certain area will do. If there is only one provider in that area, that providers has a monopoly on a very specific market with only a single consumer.
While this is an extreme case, the very nature of healthcare creates many of these 'personal monopoly' situations and, as everyone knows, monopolies rarely, if ever, produce a situation that maximizes social surplus.
Currently, we deal with these situations by requiring providers to give healthcare to anyone in an emergency situation, regardless of the individual. By doing so, however, we are requiring individuals to agree to pay a monopoly price for healthcare. This monopoly price is, obviously, much higher than an equilibrium price would be, causing a terrible inefficiency that is intrinsic to the highly personal nature of utility curves related to the provision of healthcare.
There are many other problems with the private provision of healthcare, many of these being equity issues, rather than economic ones. I'm not going to stray into equity issues at all for the moment, and I think a single well-defined instance of an intrinsic economic one is good enough. If you want more examples, just request one in the comments below.
Tomorrow I will outline my personal solution to this problem, as well as posting my normal recipe for the week. I hope you all learned a little something here.
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