Chapter 3, Problem 1QAP

To determine

The concept of market failure and the reasons behind an unregulated free marketnot being optimal for medical care.

Explanation of Solution

Market failure suggests of a situation where a market cannot optimally meet the output requirements of a society.

If the free market mechanism fails to provide the society with the output level expected, it is known as a market failure.

Market failures could happen due to a number of reasons. However, scholars have suggested five main reasons that could cause failure in a free market in the field of medical care.

There are unique aspects contributing to market failure in the field of medical care. Five such characteristics have been put forward; unpredictability, asymmetric information, trust, barriers to entry, and payment practices.

1. Unpredictability sates that the demand for medical care is difficult to determine in advance as people look out for medical care only when it is needed.

Apart from preventive measures taken to protect one from being ill, other situational illnesses or injuries cannot be predicted in advance. Hence, the demand and supply of medical products may not tally with each other causing market failure.

2. Asymmetric information suggests that the consumer of medical care is at disadvantage in relation to the knowledge on relevant information.

The specific knowledge on medical care is not possessed by a vast majority of the society. The complexity of such information makes it difficult to be understood by laymen.

3. Due to the consumer not having all information at hand in relation to their illnesses, they expect the medical professionals to act as agents of their health needs.

Here, complete trust is being exercised on the medical professionals. Patients expect them to provide a comprehensive service without any expectation.

4. The medical field cannot be entered by anyone at anytime. In order to be a medical professional, one has to go through rigorous education and training.

Further, there are licensing requirements in relation to personnel, products as well as procedures of the field. Hence, it could be said that there are high barriers to enter the field which could cause a shortage in supply and thus a market failure.

5. Payment practices in the field of medical care are mostly nonrefundable and are being borne by third parties such as insurers. The consumers are most of the time unaware of the actual cost of medical treatment they receive.

Further, until the service is being received, the consumer or the patient would not exactly know how much it would cost. Hence, the selection of an option that suits the budget is not something that can be practiced by consumers in relation to medical services.

Due to the reasons aforementioned, there cannot be a free market mechanism in the field of medical care. The absence of a free market mechanism is simply a market failure as it is not the natural or true picture of the demand and supply levels of medical services.