The private price signal

I have about two minutes to dash this off, so forgive me for brevity. Something in Aaron’s latest post struck me. He quotes Frum:

[Medicare’s pricing] method can work within the context of a private market. A price level exists “out there.”

The idea that there is some default, legitimate price in the health care market is common and wrong. There’s no legitimacy there. There’s not even one price! The only sense in which economists lend any legitimacy to private prices is to the extent the market is competitive. The unstated point of Brill’s piece is that it isn’t. Not even close. This is well known. I would think Frum would have heard.

That doesn’t make Medicare prices “right”. It just means we can’t invoke some market magic to divine the “right” price unless we first have a market that is reasonably competitive. The subtext of much of the health policy debate is whether it ever could be.

UPDATES: For typos and clarity.


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