Britain is proud of its National Health Service (NHS). In 1948, the National Health Service Act stipulated that the government would provide virtually free medical care for all citizens. Physicians receive a salary plus a per-patient payment from the government. The NHS embodies the socialist philosophy that profit-driven markets are not the appropriate mechanism for allocating health care.
Markets serve two functions simultaneously: (1) allocation of existing goods and services among competing buyers, and (2) motivation for producers to bring new goods and services to the market. The NHS was established to replace market-determined prices with prioritized waiting lists as the allocation mechanism among competing buyers. Recently, however, the NHS has embraced the profit motive as a mechanism for performing the second function.
The Economist reported that the government has introduced mechanisms to allow hospitals and individual inventors to profit from their innovations. Intellectual property rights will be assigned and protected, allowing the market to reward producers. The Economist predicts an enthusiastic reaction by producers. "In the first year of this new regime, the NHS has earned about £500,000 ($830,000) from about a dozen inventions or new techniques. There is, American experience suggests, plenty of scope for more. One American hospital alone-Massachusetts General in Boston-has an annual licensing income from its doctors' discoveries of $30m. In 2002, the hospital reckoned it made 213 discoveries, filed 104 patents, and spun out four companies."
a) Imagine a doctor in Britain finds a way to treat stomach ulcers with common kitchen ingredients, replacing a costly prescription medication. The potential marginal social benefit of this discovery would be the amount saved by the NHS on all ulcer patients' prescriptions, which is tremendous. If there are no intellectual property rights, what is likely to occur?
b) Why might your consumption of medical services confer some external benefits to the people around you?