ECON: Rebuke my TA!

Geoff Smith (
Mon, 27 Oct 1997 10:27:55 -0800 (PST)

Hello Extropians,

In an e-mail conversation with my micro-economics teaching assistant, we
got onto the subject of the inefficiencies of government as a monopolistic
firm. I am in no way experienced enough to have a sufficiently informed
debate on this topic-- could someone more learned please help me poke some
holes in his argument(although some points of his are very convincing).
Especially, how do I argue against his statement that public healthcare is
40% cheaper than private!?!

Thanx a lot,


---------- Forwarded message ----------
Date: Mon, 27 Oct 1997 09:44:36 PST
From: "JOEL F. BRUNEAU" <>
To: Geoff Smith <>
Subject: Re: exam and comment

> (p.s. In using what little economics I have learned so far, I have this
> gnawing question which I would like to ask: Isn't the government just a
> firm like any other? It seems to me that instead of using the letter G,
> we should use F(EM) for "Firm: Enforced Monopoly." It appears that

In some sense economists do not differentiate between government and
firms in terms of production. A hospital is just another firm.

> the inefficiencies in government are for the most part caused by the
> monopolistic character of the public sector. Now, you could argue that

A caution here. It is a misconception that monopolies are always
inefficient or that competition is efficient. You will learn later
on that efficiency requires that a firm's marginal costs equal
prices. A monopoly often sets price above marginal cost so is
inefficient. However, it is not the case that increasing the number
of firms is a good idea since it might cause production costs to rise
(this is the case of a Natural monopoly). The solution lies in
regulation by forcing the firm to set price equal to MC. However it
might mean that price is less than average cost and so yields
negative profits. The solution here is to subsidize the firm so that
profits are zero. The easiest way is to turn the firm into a public
corporation financed through general tax revenues. Hospitals for
instance. Note that Canada offers the same level of healthcare as
the US but at about 40% lower costs.
Second, there are goods called puplic goods (as opposed to
private goods). Private firms will generally provide too little of
puplic goods so are inefficient (like say Education). Alternately
they may offer too much (like pollution).

> a government is not monopolistic because they are numerous on this
> wonderful planet earth, but the cost of a citizen uprooting and moving to
> another country (and the fact that some governments won't let you move in
> or out of their country) makes competition between governments almost
> nonexistant. My solution: governments that are location non-specific.

There is a model that looks at govt competition. It analyses "voting
with one's feet". Individuals move to the jurisdiction that offers
the right tradeoff between services and taxes. (eg Sask, AB, BC).

> How we get there feasibly: I'm not totally sure, but maybe we
could start
> hacking up government into a bunch of totally independent agencies(eg.
> Canadian Agency of Health Care, Canadian Agency of Enforced
> Charity(ie. welfare)), then slowly allow competition for each agency to
> emerge. Suddenly, people realize that government really is just another

The issue here is that outcomes are interdependent. Cutbacks in
healthcare affects the efficacy of social programs. The issue is one
of coordination. You will see this point made in the Game Theory

> firm, with all its citizens holding shares, and some crazy politicians
> with no business-sense at the helm.

The view that many economists make is that, yes, governments may be
inefficient but that does not mean that competition can do any
better. The converse holds as well. The issue comes down to
figuring out when one form is better than the other and always being
vigilant in pushing for more efficiency, equaty, and fairness.

Talk to you later Joel