Wednesday, May 05, 2004
Explaining the difference between prices and costs
[Thomas Sowell, "The 'cost' of medical care," Townhall, 4 May 2004.]
In this column, Thomas Sowell points out that there is no free lunch. If a politician changes the price of a good, then there will be consequences. In the market, supply and demand are constantly shifting toward equilibrium. When this mechanism is replaced with artificial prices, there are still corresponding shifts, but they no longer reflect people's desires.
If you ask most people about the cost of medical care, they may tell you how much they have to pay per visit to their doctor's office or the monthly bill for their prescription drugs. But these are not the costs of medical care. These are the prices paid.
The difference between prices and costs is not just a fine distinction made by economists. Prices are what pay for costs -- and if they do not pay enough to cover the costs, then centuries of history in countries around the world show that the supply is going to decline in quantity or quality, or both. In the case of medical care, the supply is a matter of life and death.
The average medical student graduates with a debt of more than $100,000. The cost per doctor of running an office is more than $100 an hour. The average cost of developing a new pharmaceutical drug is $800 million. These are among the costs of medical care.
When politicians talk about "bringing down the cost of medical care," they are not talking about reducing any of these costs by one cent. They are talking about forcing prices down through one scheme or another.
Many of the same politicians who are gung ho for imposing price controls on prescription drugs, or for importing Canadian price controls by importing American medicines from Canada, have not the slightest interest in stopping frivolous lawsuits against doctors, hospitals, or drug companies -- which are huge costs.
Price control zealots likewise seldom have any interest in reducing the amount of federal requirements for getting a drug approved for sale to the public -- a process that can easily drag on for a decade or more, costing millions of dollars, and also costing the lives of those who die while waiting for the drug to be approved by bureaucrats at the Food and Drug Administration.
For political purposes, what "bringing down the cost of medical care" means is some quick fix that will win votes at the next election, regardless of what the repercussions are thereafter.
[Thomas Sowell, "The 'cost' of medical care," Townhall, 4 May 2004.]
In this column, Thomas Sowell points out that there is no free lunch. If a politician changes the price of a good, then there will be consequences. In the market, supply and demand are constantly shifting toward equilibrium. When this mechanism is replaced with artificial prices, there are still corresponding shifts, but they no longer reflect people's desires.
If you ask most people about the cost of medical care, they may tell you how much they have to pay per visit to their doctor's office or the monthly bill for their prescription drugs. But these are not the costs of medical care. These are the prices paid.
The difference between prices and costs is not just a fine distinction made by economists. Prices are what pay for costs -- and if they do not pay enough to cover the costs, then centuries of history in countries around the world show that the supply is going to decline in quantity or quality, or both. In the case of medical care, the supply is a matter of life and death.
The average medical student graduates with a debt of more than $100,000. The cost per doctor of running an office is more than $100 an hour. The average cost of developing a new pharmaceutical drug is $800 million. These are among the costs of medical care.
When politicians talk about "bringing down the cost of medical care," they are not talking about reducing any of these costs by one cent. They are talking about forcing prices down through one scheme or another.
Many of the same politicians who are gung ho for imposing price controls on prescription drugs, or for importing Canadian price controls by importing American medicines from Canada, have not the slightest interest in stopping frivolous lawsuits against doctors, hospitals, or drug companies -- which are huge costs.
Price control zealots likewise seldom have any interest in reducing the amount of federal requirements for getting a drug approved for sale to the public -- a process that can easily drag on for a decade or more, costing millions of dollars, and also costing the lives of those who die while waiting for the drug to be approved by bureaucrats at the Food and Drug Administration.
For political purposes, what "bringing down the cost of medical care" means is some quick fix that will win votes at the next election, regardless of what the repercussions are thereafter.
Comments:
Post a Comment
