Economics and Health Care

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Kevin Pine Eco310 Professor Ambrose Test 2 1A. Market failure is a situation in which the allocation of goods and services is not efficient. In any given market, the quantity of a product demanded by consumers does not equate to the quantity supplied by suppliers. This is a direct result of a lack of certain economically ideal factors, which prevents equilibrium. Some major reasons that a free, unregulated market in medical care might night be optimal are: Imperfect information, asymmetric information, barriers to entry, and third-party payers. * Imperfect information is a major reason because in medical markets, patients are not fully informed about virtually every aspect of the medical transaction. These patients are forced…show more content…
1B. In the real world, a perfectly competitive market rarely exists. One or more assumptions are violated in most markets and this is certainly the case in the pharmaceutical market. * Monopoly Power. Pharmacists often face questions from patients regarding how prices of medications are determined and why, in some cases, they are so expensive. Unlike markets for other goods, in the pharmaceutical marketplace there are a limited number of manufacturers and the medication being sold are not identical, but rather are differentiated. There is a guarantee via patent protection that no potential competitor may manufacture an identical drug and sell it at a lower price in the short run. As a result, the branded manufacturer is able to make profits. Since there is only one seller, the monopolist determines the price of the medicine. This establishes the monopolist as a price setter, permitting prices above the perfectly competitive price by controlling the quantity of medication produced in the marketplace. This is in stark contrast to being a price taker, and accepting a price established within a perfectly competitive marketplace. The end result is that prices are higher under these market conditions than they would be in a purely competitive marketplace. * Barriers to Entry. A number of factors allow a pharmaceutical manufacturer to act as a
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