Question

How would you address the following concerns about competition in a healthcare market

1. Market Failure

2. External cost drive prices higher ( no government regulation on medication...increasing the price)

3. Free rider problem and inability to distribute cost ( no one would invest in research and development of new drugs)

Answer 1

1) Health care is sometimes provided as a public good . It always carries a certain degree of monopoly with it since every treatment prodcedure and response of the patient is unique . Also market failure occurs due to externalities . Privatization of the market may also lead to assymetric information . So in order to prevent such phenomenon , monitoring , strict actions against frauding , setting prices of medicines etc are required .

2) External costs of reasearch and development occurs in this industry . If a new company invests in reaseach of new medicies then it tries to cover up the costs by raising price of the medicine and also gain super normal profits . Price setting mechasing , price ceilings are necessary to prevent exploitation . Medicies are ususally inelastic goods , so the exploitating in this field is maximum .

3) Patenting system helps a company to gain by invention . But if there is no such system then they are reluctant in investing in reaseach since other companies would simply copy the formula and produce the medicine without any investment . But patenting system also creates monopoly in the market . So the ultimate solution would be patenting with some degree of price control or government subsidized medicies .