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Measuring the Cost of Health Care— The Effect of Price Controls

I am puzzled by how we should think about measuring the value of output in health care, or any market, when the prices are not at the competitive level.
What if the government has a maximum price of $500 for an angiogram, but the free market price would be $900?
In a free market, we measure GDP using output and market prices. This is a good way to do it based on the assumption that everybody is spending his last dollar where it will get the most surplus and that sellers are competitive. The marginal cost of angiograms equals the marginal benefit to the least-valuing consumer who is still willing to buy. We use that same principle to count a dollar of government expenditure as a dollar of GDP, because we assume that government expenditures are also chosen optimally (people will smile, but what’s a better way to measure government spending’s value?) Thus, in a free market the cost of angiograms would be measured at 900Q and so would the value.

In the controlled market, not enough is spent on angiograms. The price and quantity should both be higher. If we measure their value at 500Q, how do we compare that with the free market country? The measured and actual cost of health care in the controlled market is lower, but that’s a bad thing, not a good thing.

Or suppose Q stays the same, because supply is perfectly inelastic. The measured cost of health care in the controlled market will be lower, but the real cost is exactly the same— as is the real benefit— since the quantity is unchanged. All that happens is that producers are poorer and consumers are richer. Both the measured cost of health care and its contribution to GDP will be smaller in the price-controlled country.

The same problem comes up if angiograms are monopolized (or assigned a price floor).

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