A Public Choice View of Government in Healthcare

On the political scene, America's rising health care and insurance costs continue to be a main topic of debate. An article published in May by Forbes magazine conveniently frames the health care debate in terms of public choice. It argues that the government should spend more money on providing true public goods and less on goods that are simply beneficial to the public. Health care clearly does not satisfy the non-rival and non-exclusionary conditions necessary for something to be a public good. It should then, in theory, be possible for private companies to provide it in an efficient way. This is why, according to the author, the government should focus on providing true public goods which cannot be provided privately and stay out of healthcare to the extent possible.

But if health care and insurance can be provided efficiently by private firms, then why have costs continued to rise far above those expected for an economy of our size? This interesting video describes components of health care which are higher than expected and claims that the area with the largest discrepancy, that of $500 billion, is due to a lack of negotiation power with companies providing health care services. In other words, there are not many alternatives for medical services and so consumers lose the leverage that competitive market theory assumes they have.

So perhaps public choice can provide a solution. The New York Times published an article on competitive bidding laws and mentions how a "pilot program had reduced Medicare costs by 42 percent." So in this example when the government focused on enforcing the free market, health care prices dropped. The free market institution is non-rival and non-exclusionary, and therefore is something that is not likely to be provided efficiently by private companies. It seems to me like the government should focus on providing as close to a perfectly competitive market as possible. The more allocatively efficient outcome should follow naturally - and with it lower costs for consumers.


Sorry for the length - I look forward to reading the comments.

Deregulation of the Taxi Industry in Ireland

When I lived in Dublin, Ireland last summer, I noticed the large number of taxis for the European capital of only 1 million people. I commented about this to my Irish co-worker who explained to me the recent deregulation of the taxi industry in Ireland. Before deregulation, a shortage of taxis existed in Dublin and getting home from a pub on the weekend often involved waiting for over an hour in a taxi queue. I never had to wait more than a minute to catch a taxi, even in the residential area where I lived in Dublin.

This article from an economist at the University in Dublin written in 2004 describes the history and results of deregulation. Regulation of the taxi industry began in 1978 (due to pressure from incumbent license holders) and made taxi licenses scarce and expensive. The Irish economy boomed in the 1990s and the number of taxi licenses remained at nearly the same level. The average taxi license cost I£80,000 in 1997 and after deregulation in 2000 only cost I£5,000. The number of licensed taxis rose from 2,722 in 2000 to 8,609 in 2002. Taxi drivers protested the deregulation, claiming that their income would decrease, the quality of taxi service would decline, and open entry would encourage criminals and rapists to become cabbies. While the individual income of taxi drivers did decline, the consumer gained from the decreased waiting time. No other signs of decreased quality in taxi service have been observed.

With the meltdown of the Irish economy recently, taxi drivers do have a genuine grievance about their loss of income. Tourism is down and less people can afford to take taxis. Additionally, many illegal immigrants work as taxi drivers. Does Ireland need that many taxi drivers? The joke in Dublin is that anyone with a car is a cabbie. Should entry into the market be made slightly more difficult or is the (nearly) free market the best for Ireland?