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Pareto Efficiency. Health Care System


“Pareto or Social efficiency occurs when it is not possible to make someone better off without making someone else worse off”. When examining the US health care system compared to that of other countries, the government tries to balance competitive forces and the need to ensure all citizens have access since market mechanisms no longer necessarily provide the best way to improve social welfare.

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Government intervention is one of the four factors important in health economics; the rest being externalities, asymmetric knowledge between the patient and the physician which seek to favor the physician, and uncertainties within the healthcare. The government is the largest contributor to healthcare, both in terms of paying and regulation. In order to ensure that the citizens have access to improved care at a controlled cost, the US healthcare system has widely relied on competition. Although competition has achieved lower costs, the effects have been affected negatively by consolidation by providers and insurers on a lesser effect. Intervention in the healthcare by the government has been justified in the line that reduction in the healthcare costs such as by advocating competition in the sector, would compromise the quality of medical care as the health care providers try to contain cost. The government can intervene in the healthcare and use its power of monopsony to control prices associated with the medical services by controlling a larger share of spending of the healthcare. Intervention by the government can also result if the government removes most of the administrative overhead and wastes that occur in the private health insurance sector (Woolhandler, 1986). However, Ahlbrandt (1973) has indicated that control of larger share of healthcare spending may lead to increased health spending if other factors were held constant-an idea proved wrong by the study results of (Santerre, Grubaugh & Stolla, 1991) who proposes the creation of a proper environment by the government to favor the proper functioning of macroeconomics as a means to increase performance of US healthcare system. Comparison has shown that Canada and Great Britain at one time had, according to Himmeistein and Woolhandler (1989), low healthcare spending as a fraction of GNP as compared to that of the United States (11%), where both countries scored 8% and 6% respectively. Reduction in the mortality rates in Canada and Great Britain had led to a further decrease in the rates. Thus the two have supported the idea of using a national health care system (employed in places like Canada and Great Britain) as possible to achieving reduction in health costs and improved quality of care. This position was according to their study carried out on a wider range of sample is not validated further. The government holds a crucial role in making sure that the services to medical care are distributed equally to ensure accessibility by all or at least a majority. Application of neo-classical or welfarist approach to carry out an analysis in the healthcare sector by economists but further development for approaches has occurred. The healthcare output system would, according to welfarists, be better if the people prefers it “relative to arguments in the utility function” (Spencer, 2004), while development of Pareto efficiency arose because of doubt in the idea brought forward before that utility could be interpersonally compared and measured cardinally.

Previous reports indicate the poor performance of the US healthcare sector where cost of healthcare has increased. The US healthcare system performed poorly among countries New Zealand, United Kingdom, Germany, Canada and Australia to come fifth according to an update report in 2007 (Karen et. al., 2007). US performed poorly on the basis of five dimensions which included equity, healthy lives, access, quality and efficiency. This report covered data from surveys of patients, and information on what the patients viewed on their healthcare systems put in place in their countries and healthcare physicians in the primary care level (Karen et. Al., 2007). Departure of the US healthcare from the Pareto efficiency system has been attributed to the presence of externalities in the system, lack of competition, insufficient information, and lack of equilibrium in the nurse, physician and hospital markets (Mirmirani, & Spivack, 2005). The following are reasons why the government would control or intervene in healthcare market;

First, according to Rice (1998) market mechanisms or competitive forces will not offer the best way in improving social welfare in the Health care. This argument is advanced on the basis that competitive forces is founded on a number of assumptions which cannot be fulfilled in a health care situation and therefore the policies-options for the government based on this will blind policymakers on the best effective way of improving social welfare. However, if competition and demand for Health care is well understood by government, the Pareto efficiency can be achieved.

Secondly, due to market failures in the Health Care which includes inequity, inefficiency, high cost and public dissatisfaction, Pareto efficiency cannot be reached and government intervention is critical. The US has continuously adopted a market-Based Health Reform because market mechanism yield distributional advantages for particular influential groups. By having a more costly health care system yield prices and income for suppliers, physicians, drug companies and private insurers. in addition overall system costs are distributed by private payment in line with the expected use of services that costs healthier and wealthier individuals less than funding from (income related) taxation.

Correspondingly, wealthier but unhealthy individuals can buy (perceived or real) better quality or access for themselves, without necessarily having to support a comparable standard for others, a thing that has deteriorated social welfare thereby undermining Pareto efficiency.

Thirdly, Pareto efficiency can be achieved through Government intervention in health care market, if a system of universal health care is implemented. This will ensure health care is provided to all citizenly, elderly, disabled, young and old, military services, families and veterans, children and even the poor. On the other hand, the government can provide law incentives with an intention to creating market incentives that would help in lowering health care costs.

The Government can also improve on health care regulations and oversight and ensure system efficiency through reducing time taken to seek care and increase in emergency care, co-ordination, reduced administration costs as well as ensuring equity in coverage and other demographic differences.


Finally, the government can implement a health care reform seeking to broaden the populations that receive health care coverage. Though either public sector or private sector insurance programs expand the array of health care providers consumers may choose from, improve access to health care specialists, improve quality of health care and decrease cost of health care. These will ensure government balance between the competitive forces of market and social welfare.


Ahlbrandt, Roger S. Jr. “Efficiency in the Provision ofFire Service.” Public Choice 16 (1973): 1—15

Health economics. 2009. Web.

Karen D., Cathy S., Stephen S., Michelle D., Alyssa H., Jennifer K., and Katherine S. Mirror, Mirror on the Wall: An International Update on the Comparative Performance of American Health Care, The Commonwealth Fund. (Ed Deborah Lorber). 2007. Volume 59

Mirmirani Sam and Spivack Richard. Health care system collapse in the United States: Capitalist market failure! De Economist. 1993. Netherlands; Springer

Santerre Rexford, Stephen Grubaugh, and Andrew Stolla. Government intervention in health Care markets and health care Outcomes: some international evidence. 2009. Web.

Spencer Anne. Ecn 369: Health Economics: 2004. Nima Patel, Amanjot dhillon: Define the extra-welfarism approach to health and discuss the similarities and differences with the neo-classical model of welfare economics. Web.

Thomas H. Rice (1998). The Economics of Health Reconsidered. Michigan, Health Administration Press.


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