Health economists use the phrase “supplier-induced demand” to describe the ability that physicians have to influence their patients’ demand for medical care. One of the reasons that this ability exists is asymmetric information.
a. What do physicians know more about than patients?
b. If physicians can influence their patients’ demand, then what would prevent them from always providing diagnoses of severe conditions that require expensive (profitable) treatments?
c. Health economists point out that third-party payment schemes (such as medical insurance that pays your medical bills for you) also contribute to supplier-induced demand. How would third-party payment exacerbate the problems of asymmetric information?