Market Failure or How The “Free” Market Isn’t What You Think It Is.

Market failure is broadly defined as a situation where the market fails to efficiently deliver a good or service from the suppliers to the consumers. This could be due to a whole bunch of reasons including market barriers, capital restraints, my stomach hurts and I don’t feel like it, or for political reasons. My post today concerns the last reason and why we experience market failure in the U.S. for political reasons and why it isn’t always necessary.

According to supply side economists as well as staunch free-market supporters, the free market will arrive at perfect efficiency given enough time and no governmental interference. However much they want to believe this is true, we can clearly see that there are examples of market failure which exist today. What I mean is that there are certain goods and services that U.S. consumers use and need in order to function which the “free” market has failed to adequately provide. Let’s take a look at the first case, which has caused market failure precisely because it has not abided by free-market principles: The internet. 

“But we have internet everywhere in the U.S. Derrick” you might say. You’re somewhat right, disembodied voice in my head, but not all the way. In a perfect market, we would see several internet providers competing for business among consumers in a given city. Each provider would offer competitive prices or increased speed in order to capture more market share from their competitor. In 2014, FCC chairman Tom Wheeler said that at 25mbps speed, which is considered a reasonable benchmark, around 80% of Americans have only one choice for internet providers.  As I mentioned before, market failure can occur when there are significant barriers to entering a market. This would be true if it weren’t for the fact that the internet service providers (ISPs) are helping to write bills which outlaw communities from creating their own internet service. The ISPs do this by donating money to a representative’s campaign fund which helps get beneficial bills passed for them. There have also been significant efforts to bar other ISPs from using the same utility poles to provide internet to individual houses so as to keep a stranglehold on their current customers.

The map below shows a brief comparison between cost and speed between the U.S., Europe, and Asia. The size of the dot represents cost, and the color represents speed. The United States has very large dots colored sea green-the lower end of the speed spectrum. Looking over to Asia we see orange and red-the fast end of the spectrum. Their dots don’t seem to be bigger than the U.S., yet they have better internet. After living in South Korea I can tell you the difference between our internet speed is like the difference between a formula one car and a baked potato. Hey at least we pay more!

worldmap
Source: PBS Newshour
So this perfect storm of factors has led to no choices, high cost, and has removed the ability of a community to create their own service in 20 states. We pay much more for worse service. This is what I mean by market failure. In this case, it is exactly because the internet is not sold in a free market that our prices are high and the quality of our internet is low. Our political system is vulnerable to anti-competitive measures via lobbying efforts, and has slowed our national progress in what many consider a vital resource. The United States should have the fastest internet in the world- we invented it – and we should pay the lowest prices since we have the “freest market”.

The second example of market failure is health care. Fortunately there has been a great deal of attention paid to this area lately which might be promising for the future if it weren’t for the fundamental misunderstanding of the public as to what the government should/ought to do when markets fail. The chart below shows a comparison of spending on healthcare per capita as of 2014:

0006_health-care-oecd-full

“Ah, but health care is more expensive in the U.S. than other countries because of how much better our treatment is than the communists”, you might say. If that were true, we should expect to see better health outcomes for the same conditions as compared to other countries who spend less. The opposite appears to be true according to a 2014 OECD report. While the U.S. does slightly better than average when it comes to cancer treatment, it does poorly with treating many other types of common illnesses like heart disease and diabetes. The same report showed that a whopping 68% of U.S. citizens over the age of 65 had at least two chronic illnesses. The next closest country by the same metric was Canada with 56%.

Squires_OECD_exhibit_09

There are some mitigating causes for the fact that we spend the most in the world as a percentage of GDP(17%) on healthcare. We tend to invest more in medical technology for example. What cannot be reasoned away is the fact that we as a country spend more on healthcare than our international counterparts and our health outcomes are worse than average-sometimes much more so.

This is a prime example of market failure. We do not lack the supply of care nor the funds to provide that care. We invite doctors from all over the world to study medicine here, so we do not face a knowledge or technological barrier. Rather, the market has failed here because health care is ill-suited to the “free” market. People must spend more in the U.S. to receive the same amount of service because because the alternative is death. The number one cause of bankruptcy in the U.S. is health care related debt., and 78% of those people had insurance! The insurance and pharmaceutical companies dictate much of the cost, and a part of that cost is margin(I mentioned part of how this happens in my first post). There is a reason why almost all of the modern world does not allow health care to be a for-profit industry: when it is, it costs more and has poorer outcomes.

Internet service and health care both share similar characteristics: they are both needed in order to function in the modern world, they both cost more relative to the rest of the world, the U.S. provides poorer quality relative to price, and the supposedly “free” market in which these two systems operates in is not only not free, but it’s being kept artificially insulated from free market competition as a result of margin-driven interests. The people of the U.S. need to decide which sectors should not be submitted to margin-interests. We agree that police, fire protection, postal service, k-12 education and a number of others should not be for profit because it benefits society regardless of who can pay for it. Why not health care and internet; two industries which are now essential to a growing economy?

 

 

 

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