Government as Price-Maker vs. Taker

Megan McArdle makes a great point that should be absolutely uncontroversial:

government is much better as a price taker than a price maker.
Government procurement is all kinds of tedious and cluttered with red
tape, but in the end there's no gigantic problem with the government
pencil supply. Defense procurement, on the other hand, is pretty well
agreed to be godawful-expensive for what we get, the only excuse being
that we can't think of another way to buy fighter planes.

That means that government procurement alongside a free market looks a lot
different from government procurement when the government is the only
buyer. Yes, the health care market is extremely screwed up, but the
prices in it do tell you something about demand for various services,
and provide some signals about cost/benefit. You may think that viagra
is a prime example of wasted pharmaceutical R&D spending (though if
you do, I am willing to bet that you are either under forty, or
female), but the fact that a lot of people are willing to pay a fair
amount of coin for it tells you that they probably feel it is improving
their lives in some significant way. Governments can estimate
cost-benefit when the benefit is limited to crude mortality
improvements, but they are pretty much at sea when it comes to
quality-of-life. America's price signals are wildly distorted by its
insurance markets--but they're almost certainly better than no signal
at all.

Europe's governments operate their health care systems in the
context of an existing US market that provides information about demand
for new treatments (and of course I would argue, also the new
treatments). They don't use that price information to set what they pay
for drugs, but it does filter through to their markets--for example,
more widespread use of Herceptin for breast cancer in the US is putting
pressure on the British government to provide it. I think an American
shift to single-payer would be more problematic than the European
example for a variety of reasons related to our government structure.
But one important reason is that if we did, we'd have no where left to
get prices from.


  1. Mesa Econoguy:

    No, price-maker.

    Zero competition.

    “Why don’t we give healthcare over to the government, and let them ‘reduce’ cost.”


  2. Mesa Econoguy:


  3. epobirs:

    Nobody should rationally viewViagra as wasted R&D spending regardless of whether they're a potential user or not. The original purpose of the drug was for treating hypertension and cardiovascular disease. The ability to produce erections in otherwise impotent men was a side effect that rescued the spending from being largely wasted. Viagra is used to treat high blood pressure but its fortunate yet unintended application has paid off far better.

    Further, most causes of impotency are not exclusive from other health issues. Researchinto the treatment of impotency is highly likely to produce valuable data for other fields of health care. Anything that increases our basic knowledge and understanding of our biology cannot be without benefit, even if the immediate application is frivolous to some.