The visible hand in economics

I generally enjoy The Economist’s blog, but I think they’ve taken their free-market philosophy a little far with their post on the “de facto monopoly of the American Medical Association in the distribution of licences to practice medicine.” Their claim is that the AMA extracts large rents from their monopoly and unfairly prevents other from practicing medicine. I don’t know what sort of rents doctors get from their education so I can’t comment on that. A more interesting question is whether it would be efficient to allow a deregulated market in medical practice.

Every time you go to the doctor you are, effectively, contracting for medical services. A well-known problem in contracting theory is lack of verifiability. The problem is that it is very costly to you to find out whether the doctor is providing you with high quality medical services. If you are not yourself trained as a doctor then you have to seek the opinion of someone who is in order to verify the quality of service you received. Even then, there is a question mark over the third party’s credibility: they may want to either protect the reputation of medical practitioners or, alternatively, destroy the reputation of competitors. Even the knowledge that you recovered from illness is not enough since this is a very noisy signal of medical quality. Without specialist knowledge it is impossible to know what the outcome would have been in the absence of treatment. The suggestion that consumers ought to have “choices over traditions of training and styles of care” suffers from the same problem. In the absence of highly specialised knowledge there is no way for consumers to verify the quality of each style of care.

There are two possible remedies to the problem of verifiability: information and regulation. Consumers can be informed by the AMA about the choices they face in a deregulated market or the market can be regulated. Unfortunately, it is simply not possible to become an expert on medical care by reading a couple of pamphlets. Placing the burden on consumers to choose wisely is unlikely to result in an efficient health care outcome. By contrast, regulation puts the burden of choice on experts in the field for whom it is far less costly to evaluate performance. It is quite possible that the rents that the AMA extracts from consumers are far lower than the costs to society of deregulation.

Over at Cato Unbound the health care debate rages on. David Cutler and Dana Goldman reply to Robin Hanson’s original article by almost agreeing with him. They both begin by acknowledging that much of our current health care spending is wasted. The gist of their criticism is that when you reduce health care consumption then you reduce necessary as well as ‘wasted’ health care. Consequently they call for increases in the effectiveness of spending rather than cuts to it. Note that Hanson never claims that the spending that does happen shouldn’t be controlled by doctors to ensure that necessary procedures still get performed.

Moreover, the criticism really seems to be an attempt to avoid the problem by simply wishing it away. Nobody denies that it would be nice if no health spending were wasted and it were all highly effective for treatment purposes: the fact is that it’s not and it probably never has been. As Hanson asks in his reply, “why must this distant possibility [of better health care] stop us from publicizing and acting now on our consensus that we expect little net health harm from crude cuts?”

Ezra Klein claims that some of the spending might be justified in order to raise peoples’ quality of life showing that we care. This might be a valid point, but I question whether that money couldn’t have a greater impact on peoples’ quality of life if it were spent elsewhere in the government’s budget. I have never been one to call for slashing social spending indiscriminately, but I’m surprised by how weak the replies to Hanson’s rather radical essay have been. The overwhelming response seems to be a knee-jerk rejection of such extreme spending cuts without a real refutation of the reasoning behind them.

Matt’s talked in the past about fuel taxes to reduce emissions and reduce the time cost of congestion. This paper suggests that there may be further benefits to a fuel tax. Using US data the author estimates that

…a $1 increase in gasoline prices would reduce obesity by 15% in the U.S., saving 16,000 lives and $17 billion per year. These monetary savings would offset approximately 16% of the increased expenditures on gasoline. Additionally, …13% of the recent rise in obesity from 1979 to 2004 can be attributed to the decline in real gas prices.

He attributes this to both an increased time spent on incidental exercise and a reduction in eating at restaurants. It seems almost too good to be true, and perhaps it is, but it’s certainly an interesting alternative to taxing unhealthy foods.