8.7.09

ALLOCATING SCARCE RESOURCES. Lynne Kiesling puts together a link-rich post on health care policy. The key point:
On a related note, Doug Bandow writes at Cato @ Liberty about Uwe Reinhardt on health care. Commenting on criticisms of government-provided health care’s rationing of services, Reinhardt points out that rationing is a fundamental function of markets too. He’s technically correct, from a static neoclassical perspective — given a set of resources and unlimited wants, our budget constraints necessitate rationing, and in markets price signals interact with our subjective individual preferences to enable us to allocate our resources optimally.
That, however, presupposes that individuals have resources to allocate.

Put another way, and from a Hayekian perspective, who is doing the rationing matters. With government mandates, bureaucrats do the rationing. With a market for health insurance and health care services, individuals do the rationing. Apply the knowledge problem here as Hayek did to the failure of central planning, and you see the analogy that I think is apt.

Just as individual planning generates superior static and dynamic outcomes relative to central planning, individual rationing generates superior static and dynamic outcomes relative to central rationing, because of the knowledge problem and heterogenous agents with diverse preferences and private knowledge of their own preferences. It also honors the precepts of individual liberty.

I suspect, however, that advocates of a government-paid health care system will draw parallels to Anatole France's bridges. Tonight, however, I was listening to an Extension 720 debate on the nature of the government's participation. The proposal taking shape in Congress is for a government insurance company to compete with the private insurers. But one of the guests on the program suggested there were effectively two private insurers, Blue Cross and somebody else, in Illinois. Introduce the government, create a triopoly. With differentiated products, there's no equilibrium ... it's not only physics that has three-body problems.

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