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April 11, 2011 / David Woodford

The need for the NHS points out the major problem with markets

The theory of markets is very convincing that markets will maximise utility, ie) ensure the people who could make the best possible use of things get them. For example, the company that is the most efficient at producing something will be able to pay the highest for the equipment and labour needed so it will be the company that gets these resources.

However, when you consider markets where consumers buy goods and services an apparent problem quickly becomes visible. The problem we have is that if a person is seriously ill it is likely they would be willing to spend all of the money they have to get treatment. However, it is not necessarily the person who has the most money that will gain the greatest utility from being alive (a cold way of putting it but the purpose of money is to quantify things).

This problem seems to exist in all markets. The purpose of highlighting health care is that is where it is indisputable and has led to the creation of the NHS. For example how do we know that someone richer than you enjoys living in their house more than you would or enjoys driving their car more than you or even simply enjoys higher quality food more than you.

Of course some people are richer than others for different reasons some of which are taken into account by markets. IF you make yourself richer by doing a more unpleasant or dangerous job or if you work longer hours then the maket is right to enable you to outbid other people because you have demonstrated your greater desire for those goods and services by earning the money to buy them. IF you are simply richer because you are in a position that enables you to earn more through luck (by being clever or having well placed connections) then the extra money you have earnt hasn’t demonstrated your a greater desire for the goods and serivecs you buy so it is inefficent that you are able to out bid people.

This is an area that I would like to gain a deeper understanding of. It seems that markets might seek to maximise the derivative of utility with respect to time rather than maximise utility itself as this would encourage people to choose work over leisure even when they both provide equal utility in the short run.

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