Why does the government supply collective wants

If prices are too low, there will be consumers who cannot buy all that they want. As a result, consumers may bid more, or suppliers may see the possibility that they can raise their price but still be able to sell all that they want.

Simple observable indicators like these, the presence of excess demand or supply, determine how much of a good or service is sold and the price that it is sold for. This simple model of a market for a single good shows one way in which society decides for whom to produce. Consumers can obtain goods if they are both willing and able to pay for them; the more willing and the more able that they are, the more that they can potentially consume.

Also, a strong willingness and ability to pay is reflected in high demand even at high prices, which signals to suppliers that they should supply more. So, scarce resources are allocated to producing goods for which demand is high rather than other goods for which the willingness and ability of consumers to pay is less. The demand for such goods is lower and their prices are lower. This, therefore, also shows how markets decide what to produce as well as for whom.

If we also assume that suppliers aim to make as much income as possible from what they sell, then they will wish to keep down the costs of production by choosing the most efficient production methods. So, markets also help to determine how goods are produced as well as what and for whom.

Of course, the real economy is far more complex than this and no economist would pretend that this simple model is a precise description of reality. But the point is that markets do not result in a random allocation of scarce resources, but one that is the result of the incentives provided to economic actors, both consumers and producers, by prices. If we are considering the market for health care, we will be interested in the demand for health care.

However, in considering this demand, it is important to recognise that health care has special characteristics that may make it different from other goods. One factor is that health care is not usually demanded because it is in itself pleasurable; in fact, it may be unpleasant. Instead, it is demanded mainly to improve health. So, even if health care is in itself unpleasant, it leads to more pleasure than would otherwise have been the case.

If health care is only demanded in order to improve health, is there then a demand for health improvements? However, its relationship with the demand for health care is not one-to-one, because although health is affected by health care, it is also affected by many other things and it also affects other aspects of welfare, not just health care. As a good, health is even more peculiar than health care, because of its characteristics.

It is less tangible than most other goods, cannot be traded and cannot be passed from one person to another, although obviously some diseases can. In the context of ordinary goods and services, economics distinguishes between a want, which is the desire to consume something, and effective demand , which is a want backed up by the willingness and ability to pay for it.

It is effective demand that is the determinant of resource allocation in a market, rather than wants. But in the context of health care, the issue is more complicated than this, because many people believe that what matters in health care is neither wants nor demands, but needs.

Health economists generally interpret a health care need as the capacity to benefit from it, thereby relating needs for health care to a need for health improvements.

Not all wants are needs and vice versa. For example, a person may want nutrition supplements, even though these will not produce any health improvements for them; or they may not want a visit to the dentist even if it would improve their oral health. The conclusion from this is that the demand for health care can be analysed as if it were any good or service, but it has peculiarities that may mean that the usual assumptions about the resource allocation effects of markets do not hold.

Moreover, it may well be that people wish resource allocation to be based on the demand for health or the need for health care, neither of which can be provided in a conventional market. The supply side of the market is analysed in economics in two separate but related ways. One is related to the resource input and goods output model outlined above, looking at how resource use, costs and outputs are related to each other within a firm.

Some of the issues that this illuminates concern efficiency in production, which will be discussed below.

Others include issues such as economies of scale - for example, are there any cost savings through having larger general practices? The other way in which supply is analysed is so called market structure - how many firms are there supplying to a market and how do they behave with respect to setting prices and output and making profits?

There are two well-known theoretical extremes of market structure. Perfect competition has very many firms in the market so that none has any real economic power, none makes any profits, prices are as low as they can be and output is as high as can be.

A monopoly has only one firm, which has great market power, makes as large profits as can be had and has higher prices and lower output. Other models are somewhere in between. The behaviour of some health care organisations, such as pharmaceutical companies, providers of services like dentistry, ophthalmic services and pharmaceutical dispensing and for-profit insurance companies can relatively easily be analysed using these models.

It may be more difficult for other organisations. However, they may provide relevant insights, for example regulation of the UK provider sector is increasingly guided by the use of market forces involving contestability to provide some competitive pressures for efficiency. Economics analyses many economic activities by according to marginal principles, which is a special case of what is called incremental analysis.

Incremental analysis means that the effects of changes in the use of resources are examined according to how they differ from current use. Analysis is focussed on, for example, how much costs and benefits are increased or decreased due to a change in resource use, rather than the absolute levels of costs and benefits that exist after the change. It does not mean an unimportant change — the costs and benefits involved even in a small change in resource use could be very large.

There are two reasons for analysing incremental and marginal changes. First, looking at incremental values of economic variables often gives a better view of the issues faced in decision making.

Secondly, an influential economic theory suggests that people do, at least implicitly, make decisions using marginal principles. For example, the marginal cost of a good or service is defined as the extra cost that is incurred by producing one more unit of it.

That cost could be large, even though the change in the amount of the good or service is small. As an extreme example, suppose that the service is a particular surgical operation and the surgical unit performing it has reached full capacity for its operating theatre. Performing one extra operation would require a new theatre to be built, so its marginal cost would be very high. However, the marginal cost of the last operation performed within the existing capacity may have been quite small, simply the cost of theatre staff, disposables and subsequent care.

As this demonstrates, marginal cost may vary considerably with respect to the same size of change in the other variable, in this case one operation, depending on the absolute level of that other variable, in this case the number of operations already being performed. A well-known example of the importance of looking at incremental costs is in assessing the impact of early discharge schemes that aim to lower hospital inpatient surgical costs by reducing length of stay.

They would be provided privately for those who could pay, but having them available benefits many more people than those willing to pay privately. If large numbers of people are vaccinated, we can prevent pandemics, such as the flu epidemic.

Everyone benefits from having roads and bridges. There is also an important coordination benefit from public support for the production of goods with positive externalities. The public mail service maintains a database of all addresses and zip codes that private mail services also use.

The Centers for Disease Control coordinates information on diseases and adjusts vaccinations to account for changes in diseases. The National Weather Service coordinates information on weather that everyone can use to plan for everything we do in our lives, from weekend picnics to airline travel to agricultural planning to disaster preparation.

And, as in the case of public goods, there are complicated ways to figure out what each person or family is willing to pay. However, it is simpler and more acceptable politically to fund such goods or the subsidies in addition to private payments through the tax system.

You are here Home. What goods and services are best provided by the public sector and which are best provided by the private sector? The government will thus have to invest in an entire infrastructure of child development from pregnancy through the beginning of formal schooling, including child nutrition and health, parenting classes, home visits and developmentally appropriate early education programmes.

The teenage years are another period of brain development where special programmes, coaching and family support are likely to be needed. Investment in education will fall on barren ground if brains are not capable of receiving and absorbing it. Moreover, meaningful opportunities for continuing education must be available to citizens over the course of their lives, as jobs change rapidly and the acquisition of knowledge accelerates.

Even well-educated citizens, however, cannot live up to their full potential as creative thinkers and makers unless they have resources to work with.

Futurists and business consultants John Hagel III, John Seeley Brown and Lang Davison argue in The Power of Pull that successful enterprises no longer design a product according to abstract specifications and push it out to customers, but rather provide a platform where individuals can find what they need and connect to whom they need to be successful.

Finally, government as investor will have to find a way to be anti-scale. The normal venture capitalist approach to investment is to expect nine ventures to fail and one to take off and scale up. For government, however, more small initiatives that engage more citizens productively and happily are better than a few large ones. Multiple family restaurants in multiple towns are better than a few large national chains.

Woven all together, citizen-enterprise in every conceivable area can create a web of national economic enterprise and at least a good part of a social safety net. But government is likely to have to do the weaving. A government that believes in the talent and potential of its citizens and devote a large portion of its tax revenues to investing in its citizens to help them reach that potential is an attractive vision.

It avoids the slowness and bureaucracy of direct government provision of services, although efficient government units can certainly compete. It recognizes that citizens are quicker and more creative at responding to change and coming up with new solutions.

At busy times, a train or bus might have to leave passengers behind because of lack of space. A public pool is another example. While it may or may not be nonexcludable, in that you may or may not have to pay to get in, it is rival. If too many people try to use, it can become overcrowded. So, a public pool is not a public good. Fireworks shows are a staple of American celebrations.

Are fireworks shows a public good or a private good? Well, it depends on the situation. In many areas, local governments use tax money to pay for fireworks shows for their citizens. First, such fireworks display are nonexcludable. Second, the fireworks remain just as beautiful regardless of how many people are looking at them. That makes them nonrival as well.

So, in general, tax-funded fireworks displays are public goods. In some cases, however, you may have to pay to see a fireworks display. For example, in a large, fenced-in area such as an amusement park, only paying customers at the park have the best views. In this case, the fireworks display is not technically a public good. Although it may possibly be considered nonrival, it is excludable. People must pay for the best views.

For starters, the free rider problem.