Good health is an important factor to an individual’s welfare. It is an essential prerequisite for the enjoyment of life. For this reason the importance of healthcare to governments is great and vast amounts of resources are allocated to healthcare, for example in the UK healthcare equates for 6% of GNP.
Some argue that Healthcare is a social issue rather than economic but the allocation of scarce resources and the inelastic demand for healthcare lends it self to economic analysis.
Equitable allocation of a commodity is one in which everyone receives a minimum standard and quantity. So in terms of full equality in the society everyone should consume the commodity equally. In healthcare this argument becomes complicated, should everyone receive a minimum standard of healthcare? Or should everyone get the best healthcare available? The truth is that hospital buildings, doctors and medical equipment all take up resources. The best standard of healthcare could only be given if all of the government’s resources were allocated to the provision of health. This would be a foolish thing to do, as other commodities would not be produced which may be detrimental to health and other aspects of life.
Healthcare is different from all other products in that the (supplier) doctor knows more about it than the (consumer) patient. Consumers can distinguish between two types of product and choose the one, which gives them greatest utility but with health care the patient is not educated enough about medicine to choose between two treatments and must therefore go with what the doctor recommends. This imbalance of knowledge gives the healthcare industry suppliers monopoly power. A healthcare supplier could lower the standard of service and not fear loss of customers. A doctor may also recommend a treatment that is costly and therefore will bring in higher profit for himself without the average person knowing any better.