Health Care's Simple Economics
04/30/09 - by Donald J. Boudreaux, Chairman of the Economics Department at George Mason University.
Parable: "The ten of us went to dinner together. We agreed to split the bill. I ordered a bottle of wine, the Steak Grande, and the Fudge Remorse dessert. Eating as a group is quite expensive."
[edited] Consider Medicaid and Medicare, huge socialized health-care programs funded with tax dollars. Millions of Americans covered by them consume medical services without paying the full costs. The result is that these services are over-consumed.
Russell Roberts is my George Mason University colleague. He asks, if you go to dinner with a large group of strangers, and you know that the bill will be split evenly, will you order pricier dishes and drinks than if you were paying only for yourself?
The answer is surely "yes." Let's say that you'd be content to order the pork chop priced at $15, but would get even greater enjoyment from ordering the rack of lamb priced at $25. If you alone were responsible for your tab, you'd order the lamb only if it is worth to you at least the extra $10 that it costs. So suppose that you value the lamb by only $8 more than you value the pork chop. In that case, you'd order the pork chop. You wouldn't spend an extra $10 to get extra satisfaction worth only $8.
But if the bill is evenly shared among yourself and nine others, then if you order the lamb, your share of the higher bill will be only $1. That's $10 split evenly 10 ways. You'll order the lamb.
Such sharing of our medical-care bills takes place now on a massive scale. It is impossible to see how expanding this sharing will reduce the bill for each of us.