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?


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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