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Government as Price-Maker vs. Taker

Megan McArdle makes a great point that should be absolutely uncontroversial:

government is much better as a price taker than a price maker. Government procurement is all kinds of tedious and cluttered with red tape, but in the end there's no gigantic problem with the government pencil supply. Defense procurement, on the other hand, is pretty well agreed to be godawful-expensive for what we get, the only excuse being that we can't think of another way to buy fighter planes.

That means that government procurement alongside a free market looks a lot different from government procurement when the government is the only buyer. Yes, the health care market is extremely screwed up, but the prices in it do tell you something about demand for various services, and provide some signals about cost/benefit. You may think that viagra is a prime example of wasted pharmaceutical R&D spending (though if you do, I am willing to bet that you are either under forty, or female), but the fact that a lot of people are willing to pay a fair amount of coin for it tells you that they probably feel it is improving their lives in some significant way. Governments can estimate cost-benefit when the benefit is limited to crude mortality improvements, but they are pretty much at sea when it comes to quality-of-life. America's price signals are wildly distorted by its insurance markets--but they're almost certainly better than no signal at all.

Europe's governments operate their health care systems in the context of an existing US market that provides information about demand for new treatments (and of course I would argue, also the new treatments). They don't use that price information to set what they pay for drugs, but it does filter through to their markets--for example, more widespread use of Herceptin for breast cancer in the US is putting pressure on the British government to provide it. I think an American shift to single-payer would be more problematic than the European example for a variety of reasons related to our government structure. But one important reason is that if we did, we'd have no where left to get prices from.

Posted on March 14, 2008 at 07:06 PM | Permalink


No, price-maker.

Zero competition.

“Why don’t we give healthcare over to the government, and let them ‘reduce’ cost.”


Posted by: Mesa Econoguy | Mar 14, 2008 10:13:58 PM


Posted by: Mesa Econoguy | Mar 14, 2008 10:16:50 PM

Nobody should rationally viewViagra as wasted R&D spending regardless of whether they're a potential user or not. The original purpose of the drug was for treating hypertension and cardiovascular disease. The ability to produce erections in otherwise impotent men was a side effect that rescued the spending from being largely wasted. Viagra is used to treat high blood pressure but its fortunate yet unintended application has paid off far better.

Further, most causes of impotency are not exclusive from other health issues. Researchinto the treatment of impotency is highly likely to produce valuable data for other fields of health care. Anything that increases our basic knowledge and understanding of our biology cannot be without benefit, even if the immediate application is frivolous to some.

Posted by: epobirs | Mar 15, 2008 11:08:30 PM

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