Medicare - safe in their hands?

The government is talking about Medicare being 'too expensive' and are preparing to find ways to cut expenditure or raise more revenue.

Australia came to funding public health care in the 1970's, about 25 years after the UK. Why is that relevant? Australia claims Medicare was based on the British National Health Service, a dubious claim at best.

It is important to understand why medical care is provided by government. Health care is an imperfect information good and is often referred to as a merit good. The market will not provide the optimal quantity of health care because consumers don't fully appreciate the value of it.

The diagram shows the situation for health. The true value of health care is given by the red demand curve MSB, but consumers only see the value to themselves as the blue demand curve MPB.

For example when somebody decides to have a flu vaccination they do so to prevent them catching the virus, but don't consider how this also helps stop the flu from spreading to others. Therefore some people don't get vaccinated because they only consider their own benefits against the cost.

The result is that the market only provides 0Q1 units of health care and not the market optimal quantity 0Q*.

So governments subsidise health care, reducing the price to people so they are prepared to seek more medical advice and undergo more treatments. This helps raise overall welfare as people miss fewer days of work, seek preventative medical treatment and so avoid more serious illness and prevent epidemics through vaccinations.

The debate on Medicare will now rage. However it is important to remember that Medicare is not the comprehensive, "free at the point of use" system the UK offers. A comparison of the two would be instructive.

The ABC's Drum surveys the history of medicare here