Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Sunday, February 27, 2005

Subsitution and Subsidized Health Care

Question: What is the price elasticity of demand for health care?

Answer: It is greater than zero. Demand curves are not vertical.

Repeat that. Demand curves are not vertical.

The result is that charging a zero price for health care will increase the quantity of health care demanded, and charging a price that covers its costs will reduce the quantity demanded. Consequently, this (quoted with approval by Brad DeLong) is just plain wrong:
The way things are going, in the future people are going to be choosing to spend X percent of their income on health care. X will get larger and larger over time, by choice. So let's say X is 40 percent. From one standpoint, it really doesn't make a difference whether you pay 40 percent of your income for private health care, or 40 percent of your income in taxes that then go to government-administered health care.

It makes a huge difference whether individuals face the prices for health care.

Thanks for the pointer to Alex Tabarrok at Marginal Revolution, who points out another major omission in that quote: taxes also have a distorting, dead-weight loss effect.

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