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Optimal Public Rationing and Price Response

Research output: Contribution to journalArticle

Simona Grassi, Ching to Albert Ma

Original languageEnglish
Pages (from-to) 1197-1206
Number of pages9
JournalJOURNAL OF HEALTH ECONOMICS
Volume30
Issue number6
Early online date3 Sep 2011
DOIs
Publication statusPublished - Dec 2011

King's Authors

Abstract

We study optimal public health care rationing and private sector price responses. Consumers differ in their wealth and illness severity (defined as treatment cost). Due to a limited budget, some consumers must be rationed. Rationed consumers may purchase from a monopolistic private market. We consider two information regimes. In the first, the public supplier rations consumers according to their wealth information (means testing). In equilibrium, the public supplier must ration both rich and poor consumers. Rationing some poor consumers implements price reduction in the private market. In the second information regime, the public supplier rations consumers according to consumers’ wealth and cost information. In equilibrium, consumers are allocated the good if and only if their costs are below a threshold (cost effectiveness). Rationing based on cost results in higher equilibrium consumer surplus than rationing based on wealth.

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