Behind this article in The New York Times is an interesting question alluded to in its final paragraph: should health care prices be regulated or free? PhD dissertations and books are written addressing this intricate important question that can’t be done justice in a few paragraphs but I couldn’t help my mind from wandering as follows:
Capitalism and free market economies have one great virtue: the invisible hand that sends information (through prices) to those activities and their actors that are valued most. The latter can be quantified by the aggregated willingness to pay (WTP) of people, which is the upper ceiling on the price they are willing to—and can—pay for those activities. As such the prices in free markets direct resources in a decentralized manner. And economics 101 tells us that under perfect competition the resulting market price leads to an efficient equilibrium between supply and demand. Simple, yet remarkable.
The rub, of course, is that this holds under perfect competition and in equilibrium for society at large, not for each individual. Humans tend to form coalitions to preserve and even better their lot (by preventing perfect competition and efficient equilibria :). And even an efficient market equilibrium does not regulate the distribution of its efficiently produced value. As we are witnessing (one century after the previous excesses that led to “cottages” in Newport, for example), this can lead to a widening of the income and wealth distribution, and even to a “winner takes all” equilibrium as in sports and technology markets. Like some of you, I am benefitting from the fact that the willingness-to-pay for health care and education is so large, especially parent’s WTP for their children reflecting the perceived lifetime value they are to receive from those activities. (Technological gadgets like iPhones also seem to command high WTP, even for short-term value 🙂 I keep being amazed during my travels seeing kids run with smart phones in their hands and workers watching their gadgets on the job… This observation is no longer surprising, but it is surprising how this so quickly—in one decennium—became a global phenomenon. No wonder Apple is the highest-valued company…)