the american economic review
uncertainty and the welfare economics of medical care
introduction : scope and method
this paper is an exploratory and tentative study of the specific differentia of medical care as the object of normative economics. it is contended here, on the basis of comparison of obvious characteristics of the medical-care industry with the norms of welfare economics , that the special economic problems of medical care can be explained as adaptations to the existence of uncertainty in the incidence of disease and in the efficacy of treatment.
it should be noted that the subject is the medical-care industry , not health. the causal factors in health are many , and the provision of medical care is only one . particularly at low levels of income, other commodities such as nutrition , shelter , clothing , and sanitation may be much more significant. it is the complex of services that center about the physician , private and group practice , hospitals , and public health , which i propose to discuss.
the focus of discussion will be on the way the operation of the medical-care industry and the efficacy with which it satisfies the needs of society differ from a norm , if at all. the "norm" that the economist usually uses for the purposes of such comparisons is the operation of a competitive model , that is , the flows of services that world be
offered and purchased and the prices that world be paid for them if each individual in the market offered or purchased services at the going prices as if his decisions had no influence over them , and the prices that would be paid for them if each individual in the market offered or purchased services at the going price as if his decisions had no influence over them , and the going price were such that the amounts of services which were available equalled the total amounts which other individuals were willing to purchase , with no imposed restrictions on supply or demand.
the interest in the competitive model stems partly from its presumed descriptive power and partly from its implications for economic effeciency. in particular , we can state the following well-known proposition (first optimality theorem) . if a competitive equilibrium exists at all , and if all commodities relevant to costs or utilities are in fact priced in the market , then the equilibrium is necessarily optimal in the following precise sense (due to v. pareto) : there is no other allocation of resources to services which will make all participants in the market better off.