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The justification for public health care subsidies often involves declaring the health care sector to have market failures, for example infectious diseases being a public good and the customer having limited knowledge of the products. Are there any other aspects of health care that can be considered market failures, and under what justification?

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  • $\begingroup$ It sounds like limited knowledge of the products is knowledge-asymmetry which gets a lot worse when the customer is comatose. $\endgroup$
    – user121330
    Jun 28 at 15:08
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The most common one I have considered is health insurance as a private market. It becomes a case of the "market for lemons", where in this case the `lemons' are the people seeking insurance. https://personal.utdallas.edu/~nina.baranchuk/Fin7310/papers/Akerlof1970.pdf

The simplified narrative goes something like this:

Assumptions: Say insurance companies sell to everyone who wants insurance at some fair rate, and we cannot discriminate based on pre-existing conditions. Some people are very sick, and cost a lot to insure (lowers profits for the insurer) and others are healthy (profitable for the insurer.)

  1. As sick people, who frequently utilize the insurance buy into the market, the average rates go up.

  2. Healthy individuals, who don't need it at much, leave the market in response to the increasing prices, which only serves to continue increasing the price.

This process of healthy people leaving and sick people joining continues until the market collapses, nearly only sick people are insured.

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  • $\begingroup$ Since everybody eventually dies and usually from a medical issue, this would be the time-inconsistent preferences market failure, is that right? $\endgroup$
    – user121330
    Jun 28 at 15:09
  • $\begingroup$ This story doesn't have depend on any sort of time-inconsistency. Even if people have perfectly consistent time-preferences this problem will still arise as long as there is a distribution of sick individuals in the population. You could probably tell another tale that depends on time-inconsistency. $\endgroup$ Jun 28 at 16:08
  • $\begingroup$ Wait, shouldn't we expect to get more sick towards the end? $\endgroup$
    – user121330
    Jun 28 at 17:33
  • $\begingroup$ Sure, but it's not a necessary part of the model I'm presenting here- that would be a different story altogether. This model says that it is sufficient to only have a distribution of sickness levels in the population. $\endgroup$ Jun 28 at 18:08
  • $\begingroup$ So your model does an ok job of describing things and therefore you can ignore anything else, even if it's real, because it tells a different story? Do economists place working models atop the hierarchy of truth as a rule? $\endgroup$
    – user121330
    Jun 28 at 18:56

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