Market Failure

AS Economics

Chapter 11 – Discuss the relevance of these concepts to the subject of health care.

Market Failure

Merit goods are the physical commodities which either directly or indirectly provides for the satisfaction of human wants. Consumer goods (or final-demand goods) are those used for consumption purposes. They can be classified into non-durable goods (such as food) and durable goods (such as refrigerators). Producer goods are those used to produce other goods and services. These comprise intermediate goods (raw materials and semi-finished items) and fixed capital goods (buildings and equipment). Services are normally distinguished from goods by their intangible nature. They are normally consumed at the instant of their production, as in the case of a haircut. 'Bads' also exist; they have a negative value and an adverse effect on human satisfaction (for example, pollution). Public goods are those which, when consumed by one individual, are not depleted (for example, street lighting and national defence).

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Externalities are an activity or part of an activity which is not given a market price, but which nevertheless has either a negative or a positive effect on the welfare of others. Negative externalities may be generated by, or have an impact upon, consumers (somebody playing loud music which annoys a neighbour), or producers (a factory polluting a river which causes problems for a fish farm downstream), or a combination of both (aircraft noise keeping local residents awake). An example of a positive externality is when one firm sets up a training programme which increases the supply of qualified workers to another firm. There is an incentive for such a firm to internalize the positive externality by, for example, encouraging other firms to contribute to the cost of the training programme. In general, correction of externalities as a form of market failure may require taxes and subsidies to restrict negative and promote positive externalities respectively. Alternatively, legislation could be used against negative externalities like pollution.

Healthcare being a merit good is very important to people. This is because individuals cannot give themselves adequate cover for healthcare. The cost for healthcare is so great that people can only afford it if they save for the future. If they don't they find when they are older that they do not have sufficient resources to pay for medical services or the insurance
needed to cover them.

If free healthcare didn't exist, then people may not be able to pay for
visiting doctors or pay for operations, which will determine life or death. Individuals may exhibit certain symptoms and not be willing to go to the doctor as they believe their symptoms will go away in time and that simply going to the doctors will cost a lot. This could sometimes lead to life threatening diseases.

Free healthcare encourages people to visit doctors about illnesses they are experiencing. However sometimes this can be a waste of time and money as the individual may not have any problems. Free healthcare has helped save lives as people who cannot afford to pay for serious operations can receive the treatment they require.

Since the NHS provides free healthcare, there is an excess in demand. For those who are unable to receive medical treatment their only option other than private provision is to go on a waiting list. This will of course put the lives of some patients at risk.

Athavan Arunachalam