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Monday, July 13, 2009

So what if the health care market isn't a perfect free market?

Incentives still matter!
Even in the weird real world of health care, far, far away from the textbook model of perfect competition, incentives and supply and demand still influence behavior.

If we put price controls on pharmaceuticals and lower the return to discovering new drugs, then pharmaceutical companies will spend less money on research and they will discover fewer new drugs.

If we mandate insurance coverage of new eyeglasses, people will buy more eyeglasses. The price of health insurance will be higher.

If the government pays for old people or poor people’s health care, the demand for health care will increase, and prices will rise.

If we restrict the number of people who can go to medical school, prices will rise.

If we pass tax laws that encourage employers to offer health insurance, more health care will be used and prices will rise.

And so on and so on. The fact that the health-care market isn’t a perfect match with the textbook case of supply and demand does not repeal the laws of human nature. Incentives matter.
-- from "Medical Care and Market Forces" by Russell Roberts.

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