26.10.09

OWING YOUR CADEUCEUS TO THE COMPANY STORE. Professor Mankiw points to several columns in the New York Times on the merits of government-managed health care. His own column raises a salient point.

A dominant government insurer, however, could potentially keep costs down by squeezing the suppliers of health care. This cost control works not by fostering honest competition but by thwarting it.

Recall a basic lesson of economics: A market participant with a dominant position can influence prices in a way that a small, competitive player cannot. A monopoly — a seller without competitors — can profitably raise the price of its product above the competitive level by reducing the quantity it supplies to the market. Similarly, a monopsony — a buyer without competitors — can reduce the price it pays below the competitive level by reducing the quantity it demands.

You don't have to be an author of a best-selling textbook to get this. The author of a mid-major course pack concurs.
The exercise of buying power by the canonical coal mine, or the chain store, is a bad thing, but somehow it gets transmuted into something good in the canonical state liquor store, or the state health service.
Health service workers, however, are not as placebound as the canonical Appalachian coal miners, or as tied to a vendor as Vlasic Pickles might have been. Back to Professor Mankiw.
To be sure, squeezing suppliers would have unpleasant side effects. Over time, society would end up with fewer doctors and other health care workers. The reduced quantity of services would somehow need to be rationed among competing demands. Such rationing is unlikely to work well.
His argument, however, relies on there being robust labor markets for other uses of human capital. Further inferences are left to the reader.

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