Why do most people believe that we cannot leave all health care to the market? See if you can discover the answer to this. You could construct a survey to find out what people think about the idea of health care being bought and sold like soap powder. Try to identify what people believe is different about health care. This information will help you understand some of the theory we are about to introduce. You will also need this data to carry out some of the other activities in the unit.

1. People over 16 can buy cigarettes legally (i.e. in a free market) They are making a consumption decision based upon their evaluation of the costs and benefits of smoking.

a) To what extent is their consumption decision based upon imperfect information? Why might this information be imperfect?

b) What might be the externality effects of smoking?

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Activity

Advertising is often defended on the grounds that it provides information for consumers. Take an area like smoking or alcohol and research the extent to which advertising informs or misleads consumers.

2. Look at the following information about the US and other health systems and then answer the questions.

• In the US there are around 700 different private health care insurers.
• It was estimated in 1997 that 43 million people in the US (16% of the population) had no medical cover. Researchers have found that there is a strong connection between low income, poor insurance and poor health.
• The US spends a greater proportion of its GDP on health care than any other developed economy (13.6% in 1998) and yet according to most of the health indicators used by the OECD is no more healthy than other countries.
• Countries like Australia, Canada, France and Germany have set up compulsory public health insurance schemes.

a) What might explain the connection between low income, poor insurance and poor health in the US?

b) What might explain the high proportion of GDP spent on health care in the US?

c) How might the public health insurance schemes avoid the problem of adverse selection?

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"The first question of health economics has always been simple: why not leave health care alone? Some say that it is too complex for buyers to understand, so that they would be ripped off by sellers in a free market. Perhaps they would - but so are buyers of time shares, hot dogs and jewellery. In any case, the complexity is hugely exaggerated. And even where it is not, a similar complexity does not stop a market operating in the servicing and repair of car engines" - Economist 1991

a) Think about your own experience of health care - do you think that the complexity is hugely exaggerated?

b) People buying a car or a computer are able to get the information they need to help them make a rational choice from specialist websites and magazines - do you think similar websites and magazines could overcome the information problems associated with health care?

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5. a) Does society receive externality benefits from all kinds of health care?

b) Analyse why the government might launch a health campaign to persuade people to drink less alcohol. Try to draw an externality diagram to illustrate your analysis.

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Activities

Look at the data you collected in the survey in the earlier Activity on people's responses to buying and selling health care on a free market. Try to analyse the responses in terms of market failure.