Externality Models and Health:a Rückblick over the last Twenty Years

Economists interested in the political economy of health have attempted to provide a theoretical justification for intervention in the market for health services. Traditional externality analysis, at most, provides a case for variable price subsidies, and the implications of such models do not correspond with the features of existing health care systems. This paper suggests that if the externality is viewed as arising directly from health status, the problem for health policy becomes essentially an engineering one requiring careful analysis of the technical relationships between health services and status. Variable price subsidies are not an obvious implication since individual marginal values of health care become largely irrelevant. Contract costs may be minimized if the ‘firm’ is very large and this may provide the beginning of an explanation for direct State involvement in the production and distribution of health care.