NEGATIVE EFFECTS OF COMPETITION IN A MEDICAL-SERVICE MARKET

A market for medical care is characterized by uncertain, but inelastic demand and a 'soft budget constraint'. We assume that in such a marke t, government decides on giving licenses to different private institut ions to provide medical service. In this paper we present an argument as to why competition has a negative effect on social welfare and ther efore government should only provide one license. We also explain why in such a market the profit-maximizing institutions install too high a capacity in comparison to a social optimum.