A response to a reader; The economics of government intervention

I was asked by a reader to explain how government programs in health care affect the prices we pay to the provider. I thought it was easier to explain in some charts.

Chart 1 illustrates what the marketplace in health care would bare in a free market. It could pertain to any type of medical procedure, in which market equilibrium is described at Q* and P*.

For our purposes, this type of market is described as one in which consumers pay for the healthcare they consume out of their own pockets.

For our purposes, Chart 1 could also describe a marketplace in which its participants are insured, but there are no government subsidies or regulations in place.  While this commentary does not take into account any moral hazard that manifests by the demand side being insured nor the incentive to increase the supply side prices, health insurance by its nature encourages overconsumption, since the insured are no longer held directly accountable for the costs of their consumption. In that case, the demand curve will shift out and to the right resulting in a higher equilibrium price.

Chart 2 shows what happens when the government intervenes with regulations. As chart 2 illustrates, the supply curve shifts up and to the left. There are two effects – one is intended and the other is unintended. Regulations might require the providers to be licensed. Regulations may also require drugs to meet certain standards. There are thousands of government regulations ostensibly designed to help the consumer.

The intended consequence of all regulations is to eliminate substandard practices and products. The regulation is successful in this regard as the new market clearing quantity (Q’) is less than the unhampered market clearing quantity (Q*). As we also can see from Chart 2, the unintended consequence of the regulation is to raise the market clearing price. The U.S. healthcare system is full of regulations whose stated purposes are to improve the quality of healthcare, but whose necessary side effects are to raise healthcare costs for everyone, regardless of usage.

Let’s take a look at chart 3, which illustrates a marketplace in which the government regulates and provides subsidies. These subsidies may take the form of “free” healthcare or even Medicare and Medicaid. Any type of government monetary injection into the marketplace would be considered a subsidy for our purposes.

As we can see, whenever the government provides a subsidy to the consumer, the consumer by his or her nature will always undervalue the costs of his or her consumption. As a result, aggregate demand increases and remains elevated at any given price point. This is illustrated by a shift in the demand curve out and to the right. Chart 3 illustrates this increased demand, which is the difference between the demand curves at P1.

As we can see, the effects of government intervention in the healthcare marketplace can be quite profound. While the desire to consume will increase, the price at which consumers pay will ultimately be much higher.

Keep in mind, I am not here to place a judgment call and claim that government intervention in any form is necessarily a terrible concept. We just need to be aware of what its repercussions are to all those involved. And, while we are only discussing the healthcare industry in this regard, we can extrapolate our findings to pertain to any highly regulated and subsidized economic sector. I often think of the educational and housing sectors in this regard. The more the government intervenes in the education industry, the higher tuition climbs. The more the government intervenes in the housing market, the higher house prices and rents rise.

As savvy investors, our goal is to profit consistently and methodically, while reducing undue risk as much as possible. If we know what government intervention causes, we can invest effectively. Why do you think I always recommend single-family rental investing? It’s simple; the more money and regulations the government throws at the very problems it causes, the higher house prices and rent rolls climb. It becomes a self-generating dynamo that only ends when the government effectively controls the entire sector.

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12 thoughts on “A response to a reader; The economics of government intervention

    1. It’s a great vehicle. I recommended it to a family member a couple weeks ago. I think you can only devote $10,000 a year to it.

  1. An excellent article from insider publication on real estate

    Public housing goes middle class
    States, cities subsidize complexes for priced-out white-collar renters

    https://therealdeal.com/la/2022/04/11/public-housing-goes-middle-class/

    This article helps to provide us with a glimpse into the future regarding the Great Reset and housing affordability.

    According to this article the tax jurisdictions will establish non-profit corporations in which to fund and purchase multi-family residential properties. These properties will then be rented out at rents substantially below market to those of meager or average means, and to what the tax jurisdiction deemed as necessary workers. The type of workers who would be eligible for these types of subsidized rentals would be professionals like policemen, teachers, fireman, and other workers in which it is more advantageous for them to live locally as opposed to having to commute long distances.

  2. ZeroHedges Twitter feed is out in full Pravda mode.

    I don’t have to imagine how the editors at the Soviet-era Pravda would act if social media were available during the first run of the Soviet Union. All I have to do is scan the Twitter feed from Zero Hedge for a hint.

  3. Our USDX target of 100 has been met. Upside still coming as long as rates and yields in US still rising.

    Gold rising as USDX and yields climb. This is very bullish for gold. I ask why yields are rising, not that they are. The reasons make for a gold bullish scenario.

    Hello gold 🪙🥇👋👏🔑

  4. Gold futures looking nice. Russia, China, and the rest of Japheth looking to buy on any pullback.

  5. Excellent observations Chris…..loved the charts…..reminds me of my days in university when I took an elective course in Health Care Economics for my Economics degree.

    1. We cannot ignore the millions of new immigrants who arrived here in poor health. They contribute to this decline. Add the hideous quality of the U.S. food supply, and there you have it. Generally any food product whose parent is listed on the stock exchange is constantly declining in quality, as mothership is always seeking to cut costs and boost market performance.

      And the med mafia works with these people. This includes “fast food.” They’re a symbiosis. Eat the food, get sick, to “the doctor,” get treated, get meds. A multi-trillion dollar racket that exceeds the Pentagon budget now.

      1. Isn’t it interesting how the fast food establishments were the only ones standing during covid? It’s almost like their business model was designed for no contact “safe” transactions. How lucky!

        Many good independent restaurants were forced to set up tents in parking places to try and stay open. It’s not enough to pay the obscene rent for street front commercial but now have to set up outdoor seating? Many are out of business. What luck! (for the competition).

        And I’ll add the reduction of parking spaces only helps the city meet the goal of zero emissions while frustrating those who actually want to support what’s left of the local eating establishments but can’t find a parking space. Meanwhile, Costco does not have to move their inventory to the parking lot.

        The meal delivery services that many thought was a joke became a necessity for most. What timing!

        Groceries now being delivered by a robot. Major food retailers in my area have completely remodeled their stores during covid and now are fully set up. Wow, what timing!

      1. I take 800-1,000 milligrams of quercetin a day. NOW brand quercetin with bromelain.

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