Arnold Kling  

Repealing the Laws of Supply and Demand

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Megan McArdle writes,


When you increase the demand for something without increasing the supply, you either get price increases, or shortages. Neither is what the authors are promising for their bills.

She is referring, of course, to health care legislation, which promises to raise demand, reduce spending, and not create shortages. Thereby repealing the laws of supply and demand.

UPDATE: More stinging (and apt) criticism of health legislation from Jeffrey S. Flier, Dean of Harvard's Medical School. Read the thole thing.


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COMMENTS (10 to date)
kebko writes:

But, isn't that only the case when "all else is equal"? I'm no fan of the bill, but in theory, this could happen. I mean, there is much more demand for stock trades or airline ticket purchases than there were 20 years ago, but those transactions cost us much less (or nothing) now, and there are no shortages of people willing to provide either service. A bill that simply removed barriers to entry for physicians & health care providers would raise demand, reduce spending, and not create shortages.
In fact, any bill that would be well-written SHOULD actually do those things, even if these bills won't.
A bill that limits supply or creates a price floor could reduce demand, increase spending, and create a shortage, so getting rid of that limit should do the opposite, right?

Lord writes:

So she doesn't believe in Say's Law then? For the bill increases demand by the currently uninsured, reduces it by some of the insured, those with high coverage and the unneeded, and increases spending to provide for greater supply. So she is asserting increased spending won't increase supply. Now that is repealing the law of supply and demand.

Martin writes:

Sure, the supply will respond to the increase in demand, but not in a good way. You can increase supply by more production or you can increase it by improving efficiency. The former is obviously easier than the latter, and if money is no issue nobody will bother to actually improve health care quality. The same thing is happening with our universities. They don't raise prices because they have to, they raise prices because they can.

RPB writes:

The problem is they are not fundamentally making changes that will incentivize people to increase supply of medical care. In fact, they will pass measures (price ceilings) that will likely decrease supply. Think if doctor pay is cut 35% and Med school costs the same more people will choose Med school over high finance?

Ryan Vann writes:

Kebko,

With airlines, costs were driven down after price regulations were dropped. So, we have evidence that eliminating price floors can have good results, as you claim. Unfortunately, that isn't what any of the bills being considered would do.

Lord,

I think you might be a bit confused about Say's Law. Nowhere does Say's Law imply that increased demand will shift the supply curve. Say's Law does imply that only increases in production (supply curve shifts) lead to real demand increases (demand curve shifts). A big part of Keynes work was in trying to refute Say's Law. If anything, you are citing Keynes, and not Say.

I don't bother with either Keynes or Say when looking at a single sector (they were mostly dealing with aggregates anyway). Good old fashion micro and firm theory will suffice.

Healthcare is characterized by extreme barriers to entry, an inflexible labor supply, high transactional costs, basically very rigid supply curves. By shifting demand, it just puts more strain on already limited supply factors. Prices most likely will increase with very little increase in quantity provided. This is precisely why Kebko's suggestion of addressing barriers to entry is precisely what is needed, but probably won't be legislated.

8 writes:

Everyone should be more concerned about what the healthcare bill will do to the demand for gold.

Ryan Vann writes:

8, your comment perplexes me. I fail to see any direct or tenuous link between healthcare expenditures and gold demand.

Dr. T writes:

"She is referring, of course, to health care legislation, which promises to raise demand, reduce spending, and not create shortages. Thereby repealing the laws of supply and demand."

No, you don't understand. Shortages won't exist because doctors, nurses, physical therapists, dieticians, etc. are supposed to work 100 hour weeks. Spending will be reduced because they're supposed to get paid less. When these health care professionals start resigning in droves, the government will make such resignations illegal, saying that they owe it to society to provide low cost health care.

R. Richard Schweitzer writes:

Demand for services will probably stay about the same. Most people are actually getting care now, in some form of delivery.

What is to be changed (won't work tho) is the current system of allocating costs. There will be some reallocation of benefits.

But, the factors that create costs (as opposed to prices) will remain the same. Because of the inefficiencies proposed (taxing medical equipment & supplies, e.g.) and resulting pass through, real costs will rise, reflected as prices.

8 writes:

Ryan,

Not health care expenditures. Government health care expenditures.

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