Healthcare and Education

The analysis given in my last post has a special application to the problems of healthcare and education.  It is widely asserted that these are two areas where the market has failed.  People assert that all sorts of grave ills will take place if we leave these two areas for the market to handle.

However, if my analysis is valid, then if we are to understand the impact of relying on markets to provide education and healthcare we will not only need to eliminate government programs in these areas, but we will also have to make a credible commitment to making it more difficult to implement these types of programs in the future.

I realize this is something that it would be politically difficult to implement.  It would be difficult to eliminate all social programs that provided either healthcare or education.  It would be even more difficult to write provisions into our constitution that would prevent the government from implementing programs of this sort in the future.  Making these programs unconstitutional would be more difficult than simply eliminating them, which would be hard enough as it is.

Yet, this is precisely what we will need to do if we are going to realize the full benefits of relying on markets to provide these goods.  To illustrate this I will take education as an example.  Right now there are many schools that are run by the government.  Education is a good that is primarily provided by the government.

And yet there are schools that are privately run.  They operate by charging tuition.  In contrast schools that are run by the government tend to be financed by taxation.  Education is provided at little or no marginal cost to the consumer.  It is very difficult for the private sector to compete with a product that is provided for free, or more accurately at little or no marginal cost to the consumer.  In actuality people must pay for education in either case.  The difference is that in the case of public education everyone must pay regardless of whether or not they use the service.  Consumers of private education will have to pay both tuition and taxes.

You might think that we would be able to see the full effect of relying on the private sector for education simply by auctioning off all the public schools and eliminating the taxes that are used to support them.  However this is not the case.  Would a firm be justified in investing money in building a school under these conditions if it determined that doing so was potentially as profitable as other investments with similar risk?

No, the firm would not be justified.  There would be no assurance that once the government had removed itself from education that it would not suddenly re-enter the field at some future date.  For all investors in this firm might know, the government would then offer free schooling to students thus eliminating the firm's ability to compete and eroding the value of their investment.