Market failure and health care needs

Philip Musgrove (2004:54-55, based on his earlier 1995 article)* explained why, in the health care market, demand does not equal supply, while at the same time demand and supply may not equal to the 'need' for health care.

Demand does not equal need

Budget constraints, due to either poverty or the high cost of health care are two obvious reasons why people demand health care less than what they actually need. Lack of information. Lack of information may contribute as well, for example on what type of health service they can or should attain for a given illness. On the other hand, in many cases supplier induced demand made people consume more health services and product more than what they need. Finally, externality and public goods nature of health service made people demand too much or too few.

Supply does not equal need

Because demand is often not a true reflection of need, then there is no clear signal for supplier about the true consumer's need. But in many cases, market incentives may induce supplier to supply regardless of the need. On the other hand, for some types of services, the cost is too prohibitive for supplier to deliver health care of services, so they end up supplying less than what is needed.

Supply does not equal demand

This is a classical case of market failure, due to asymmetric information and other barriers to competition. But non-market incentives, such as political or cultural issues may also be the reason.

*Musgrove, Philip (2004), Health Economics in Development, Washington, D.C: World Bank.