Question

Some forms of health care are public because the marginal cost of servicing additional persons is zero, while other types of health care are public even though marginal costs are positive, because it is impossible to exclude beneficiaries who do not pay, while some forms of care meet both criteria—zero marginal costs and a lack of exclusivity. Give examples of all three categories (recognizing that no real goods or services are perfectly pubic or fall entirely in one category or another).

Answer 1

To begin with, it is important to clarify the concepts of public goods and marginal cost. Marginal cost of health services refers to the change in total cost of providing the health service to one additional consumer. Zero marginal cost implies that there is no additional cost of incorporating an additional patient under the existing healthcare services being provide to others. Public goods (or services) are those that are neither excludable, nor rival. By non-excludability one means that it is not possible for a provider of a good/service to stop anyone from availing that service or consuming the good because he/she is not being able to pay for it. Non-rivalry on the other hand means that consumption of the good/service by one person doesn’t reduce the chances of consumption of that same good/service for another consumer.

Zero marginal cost:

Having established the concepts, examples can be taken up to show why some forms of healthcare are public. Firstly, there are some forms of healthcare for which the marginal cost of provision of that health care is 0. For example, when a patient walks into a fairly empty chamber, no additional machines are required to provide healthcare to the new patient. The room is there, all the equipments are also already there and trained personnel who are already there can do the necessary check-up. So no additional equipment costs or extra wages for hiring extra personnel is incurred. The new person who’s being provided healthcare is being done so at the same cost as the previous person so marginal cost is 0. However, the healthcare can be very much excludable if the person doesn’t pay for it. But, in a competitive market, price of the good/service is equal to its marginal cost. Since the marginal cost is 0, the true willingness to pay of consumers is not revealed and one cannot put a price on that healthcare. Thus, the price of that healthcare becomes 0. The sole motive of private sellers is profit maximization. Due to lack of profit motive for a good/service that is priced at 0, no private provider comes forward to provide that healthcare, which is why that form of healthcare becomes ‘public’. Thus, even though it was excludable, the price of healthcarer falls to 0 such that the excludability doesn’t matter anymore. What makes healthcare public here is 0 marginal costs.

Non-excludability with positive marginal cost:

Another side of the story is where marginal cost of provision of healthcare is positive but is non-excludable. This means that no consumer of healthcare can be excluded from receiving the benefits of healthcare just because he/she doesn’t pay for it. The basic idea behind this argument is that access to basic healthcare facilities is the right of every citizen and it is the duty of the elected government to make sure that basic healthcare does not come with a price. Here too, due to lack of profit motive no private producers would want to provide healthcare that is non-excludable because with positive marginal cost, the cost of the last unit of healthcare provided would outweigh the benefits associated with it. One such example is social insurance systems or other publicly financed health insurances, wherein citizens are insured and are entitled to utilize the healthcare services irrespective of whether they can pay for it or not. Here, the marginal cost might not be 0 (rather, it will be positive) because the cost of accommodating another insured citizen would mean paying for another person’s complete coverage. However, due to the characteristic of non-excludability, healthcare becomes public.

Zero marginal cost and lack of exclusivity:

A third type is where the healthcare is both non-excludable and has 0 marginal costs. Lack of exclusivity is nothing but being unable to exclude someone. For example, a public health campaign is announced for a particular neighbourhood, where the not only the services, but also the required medicines are free and non-excludable (basic right of citizens to have access to healthcare). Another such example very common in some countries is free tests done to check for HIV. All the necessary equipments are already there and there is no additional cost of catering to an additional person. It is further non-excludable because every citizen has the right to a healthy life and deserves healthcare even though he/she cannot pay for it.

Nothing is perfectly public:

In the real world, none of the goods and services is perfectly public. This is because, even though non-excludable, at some point the public good/service becomes rival. This follows directly from the economic problem that resources are limited but human wants are unlimited. For example, if there are too many people availing the public healthcare facilities for free, there will be a point where to accommodate an additional person, new machinery and more experts will be required which increases the marginal cost. Thus, they cannot be categorized as black or white- i.e. either falling in the zero marginal cost category or the non-excludable category. There is in fact a grey area where the two devitae from their corners to blend with each other. It is because of both positive marginal costs (also rivalry) and non-excludability that healthcare and some other goods/service become public. The bottom line is 0 profit motive doesn’t attract private producers and at the same time certain goods/services should not be left completely to private producers alone for the sake of protection of basic human rights. If healthcare is completely commercialized, many would be excluded on the basis of not being able to afford healthcare which would affect the nation as a whole adversely. But based on only non-excludability or only 0 marginal cost, no good/service in the real world can be 'perfectly public'.