INTRODUC TABLE 1.4 Ranking of Performance of Health Care Systems, 2000 France Canada Angola Italy Finland Zambia San Marino Australia Lesotho Andorra Chile Mozambique Malta Denmark Malawi Singapore Dominica Liberia Spain Costa Rica Nigeria Oman United States Democratic Republic of Congo Austria Slovenia Central African Republic Japan Cuba Myanmar Source: WHO (2000). A major reason for government intervention is redistributive. The underlying notion is that in just societies, people should have minimal access to certain goods, irrespective of their ability to pay. Historically, such goods were provided byA major reason for government intervention is redistributive. The underlying notion is that in just societies, people should have minimal access to certain goods, irrespective of their ability to pay. Historically, such goods were provided by private philanthropy, but apparently in insufficient amounts, providing a rationale for government intervention. Absent government intervention, market forces may lead to a situation in which less affluent populations and populations disadvan taged for other reasons, such as geographic remoteness of locations at which health services are delivered relative to where persons work and live, may have inade- quate access to personal health care services. Governments have a choice whether or not to transfer resources to disadvantaged populations in the form of income or in-kind transfers. Economists typically prefer income transfers, leaving it to the recipients of the transfers to allocate the subsidies in a way that maximizes well-being from the household's perspective (Currie and Gahvari 2008). However, for merit wants, societies clearly prefer to redistribute in kind out of a concern that households will underconsume the very goods and services to which societies attach the highest priority. Income transfers may be allocated to other goods and services instead of physician visits and other types of personal health care services. Countries differ in how in-kind transfers are made. Many countries mainly rely on direct provision through public clinics and hospitals. Some high-income countries, including the UK, Denmark, Norway, and New Zealand, as well as low- income countries, such as those in sub-Saharan Africa, rely on direct government provision of personal health care services. Governments subsidize the production of personal health care services in the form of free clinics and hospitals. In countries with limited resources, there may be few government-sponsored facilities, and the few that exist may be geographically remote from much of thecountry's population. Because of the high cost, many persons may obtain care only after their diseases have reached an advanced stage, if they receive care at all. Facilities receive budgetary allocations from the government on a regular basis. The limiting factors are the facilities' budgets and physical plant. Higher-income persons may obtain care from private providers who are not subsidized by the government. Some countries have single-payer government financing, combined with private provision. Health insurance is provided as social insurance. In these coun- tries, insurance coverage is universal or nearly so and provided without regard to a person's ability to pay. Examples of countries with single-payer systems are Canada and Taiwan. In Germany, which has had a social insurance system for health care since the late nineteenth century, coverage of employees below a certain monthly salary is mandated by law. The earnings threshold for exempting persons from social insurance coverage is set so high that the vast majority of persons are covered by the social health insurance program. Although such health insurance is provided by private sick funds, coverage attributes are subject to strict govern- ment oversight and regulation. For persons not employed, there is welfare-based insurance coverage similar to Medicaid in the United States. A third alternative is the private provision of insurance, as is common in the United States. However, even in the United States, about half of expenditures on personal health services are financed by public funds. THE EQUITY-EFFICIENCY QUANDARY AND GOVERNMENT'S ROLE While there is a broad consensus that some redistribution of resources is appropri- ate, there is no consensus on either the proper amount of redistribution or how this should be accomplished. Also, in seeking to redistribute resources, there has been an unfortunate tendency on the part of some to view public policies as almost entirely redistributional and to ignore the effects of public policies on health care resource allocation. t potential effects on incentives indi-RODUCTION AND OVERVIEW for evaluating economic efficiency, much more so than for assessing the adequacy of a particular income distribution. For this reason, economists tend to emphasize the efficiency aspects of public policies. Assessing equity and the equity-efficiency trade-offs involves making value judgments and adopting assessment approaches, which economists tend to feel rather uncomfortable doing. Much of economic analysis and this book are concerned with efficiency rather than equity issues. Lack of emphasis does not reflect a belief that equity concerns are unimportant, just that we economists do not believe we have as much to say about them. Although it is feasible to do this, technical efficiency is better judged by experts in specific technologies, such as engineers and physicians, and by health care administrators than by economists. GOVERNMENT'S ROLE IN CORRECTING MARKET FAILURES In the presence of externalities, asymmetric information, and supply-side imperfect tions, such as barriers to entry, private markets in general and competition in particular cannot achieve a socially optimal allocation of resources. In economic jargon, absent some type of government intervention, markets fail to achieve a social optimum. While government may cause distortions, a common allegation in political discourse, it may also correct distortions that occur absent government intervention. Externalities may be corrected by tax and government subsidies or by regulations that require private parties to undertake various precautions, for example that a child be vaccinated before enrolling in school or that a manufacturer eliminate or reduce pollutants arising from the manufacturing process. Incompe- tent or unethical physicians may be eliminated from the market by requiring that physicians have licenses. Antitrust policy may be a counterweight to privateHajjiciency ( Leibenstein 1966). If a unit of output can be produced with two units of labor and three units of capital, producing the unit with more inputs, for example with three units of labor and four units of capital, would be technically inefficient. Technical efficiency issues have been raised in the context of health care just as they have been raised elsewhere. For example, an issue in a health care context is whether or not for-profit hospitals are more techni- cally efficient than hospitals run by the government or private nonprofit organizations. The other type of efficiency, which is used more often in economics than technical efficiency, is allocation efficiency. The three examples above of the equity-efficiency trade-off refer to allocation efficiency. Allocation efficiency describes a situation in which scarce resources are allocated in a way that maxi- mizes social well-being given society's resource endowment. In the production process, this is done so that the ratios of each input's marginal product to its price are equal in all inputs. Households are endowed with a fixed amount of time to allocate among various market and nonmarket (e.g., time spent in leisure activities, helping chil- dren with homework) uses. Households value both leisure time and the consump- tion of goods and services. By spending less time on leisure activities and correspondingly more time on market work, households gain more resources to allocate to consumption. If, however, the return from work is reduced because in the case of a physician, the fee is reduced, or for other families, public health insurance is withdrawn when household income increases or a payroll tax decreases the return from work, public policies distort incentives to engage in market work. Both because redistributive effects of public policies are more readily under- stood by the public and because they are often easier to quantify than are allocation distortions, the redistributive aspects of public policies typically receive greater public notice. On the other hand, economists have a strong theoretical frameworkINTRODUCTION AND OVER supply of physicians' services, or cut prices of pharmaceutical products by this amount or more without having an effect on pharmaceutical research and develop- ment. But as fees decrease, physicians may reduce the time they supply to the market, and, for private funds to be allocated to investments in research and devel- opment, pharmaceutical manufacturers must be able to count on a return that covers their cost of capital. The social insurance model of health insurance provision has advantages in helping countries achieve a fairer distribution of income; moreover, the provision of such insurance improves individuals' well-being by reducing out-of-pocket expenditure risk as well. However, when public insurance is subsidized by com- pulsory payments, such as through a payroll tax, such taxes may distort decisions people make in allocating time to market work versus time spent in other pursuits. Efficiency has two meanings in economics. One is the usual meaning, which is referred to as technical efficiency (Leibenstein 1966). If a unit of output can be produced with two units of labor and three units of capital, producing the unit with more inputs, for example with three units of labor and four units of capital, would be technically inefficient. Technical efficiency issues have been raised in the context of health care just as they have been raised elsewhere. For example, an issue in a health care context is whether or not for-profit hospitals are more techni- cally efficient than hospitals run by the government or private nonprofit organizations. The other type of efficiency, which is used more often in economics than technical efficiency, is allocation efficiency. The three examples above of the equity-efficiency trade-off refer to allocationficiency. Allocation efficiency describes a situation in which scarce resources are allocated in a way that maxi