There are three basic economic questions about the use of scarce resources: what to produce, how and for whom? These questions are as valid for the healthcare system as they are for the economy in general. In healthcare, assuming the ethical imperative covers everyone in a population (see Chapters 2 and 3), these questions then translate into who pays (financing), what is paid for (economic evaluation and health technology assessment) and how to pay those who provide care. Answering these questions can be left to the market, the state or a combination of both. Healthcare systems in different countries around the world answer these questions in different ways. Despite its shortcomings, most economists would agree that markets (appropriately set-up and regulated) are in many areas the best means of allocating goods and services in the most effective and efficient manner.

This chapter takes a neoclassical look at markets and then goes on to review the many shortcomings of markets in medicine. In the case of market failure, the alternative might be provision by the state. We therefore discuss the advantages and disadvantages of state interventions (see Section 10.3). A new approach aims for international financing when neither markets nor governments are able to deliver global public goods. This chapter sets the stage for introducing options to financing healthcare (Chapter 11), identifying what to pay for in healthcare (Chapters 12 and 13) and looking at forms of payment for those who provide care (Chapter 14).

Markets

Markets are a key element of economic analysis. For our purposes, we will focus on healthcare markets, as health and capabilities as such cannot be purchased on a market. Although individuals demand good health and useful skills, the means to obtaining and maintaining these are through the consumption of healthcare and education. Therefore, it is said that the demand for healthcare is a derived demand because the real demand is for health.

Perfect market conditions exist when the products traded are homogeneous, no market entry barriers exist, complete and symmetric information is available and the number of suppliers and buyers is infinitely high. Under such complete competition, all market participants act as price-takers and their market behaviour is exclusively determined by the quantity of goods that they ask or offer on the market (quantity adjusters).