Table 7.1 Individual Demand for Oranges (Hypothetical)
Price
Quantity Demanded
S0.25 4
SOSO 3
S0.75 2
Sl.00 1
This equating of price and marginal benefit, and the resulting efficiency arguments, have been questioned in the area of health care policy. Thomas Rice (1992, 1997, 2003) argues that the demand curve for health care goods and services may not reflect consumers' marginal benefits, given the lack of information and the inability of consumers to analyze and understand relevant data regarding the purchase of these goods and services. 1bis is still a controversial argument (Pauly 1997; Gaynor and Vogt 1997), but it does raise questions about the use of the demand and efficiency criteria for health care policy.
Although willingness to pay is the term used in the cost-benefit literature, it must also be remembered, as noted in chapter 5, that income is one of the factors influencing the position of a demand curve. Oranges were chosen in the above example to illustrate the marginal benefit concept since for most people, income is not a constraining factor influencing their demand for
oranges. It can be safely argued that the reason the consumer did not purchase
the fifth orange when oranges were priced at $0.25 per orange is that the consumer did not value the fifth orange at S0.25, not that the individual did not have the income to purchase the fifth orange. For many other goods and services, both private and public, income does play a major role in influencing demand. Indeed, demand is often defined as the willingness and ability to purchase a good or service. Thus, a demand curve for a city recreation project could be further from the origin, and the total benefits larger, for a high income neighborhood than for a low-income neighborhood, simply because the high-income residents have a greater ability to pay for the recreation out
put. This is an example of the income distribution problem discussed above.
Government programs such as Medicare and Medicaid, which are designed to improve access to health care, demonstrate society's concern about income distribution problems in this policy area. Thus, even though cost-benefit primarily focuses on efficiency issues, the distributional questions are fir removed. Olsen and Smith (2001) note that, unlike the use of quality-adjusted life years (QALYs) in cost-utility analysis,