Thursday, June 12, 2014

When government outperforms private enterprise


Many people, particularly many Americans, wrongly believe that private enterprise is always more efficient and less expensive than government. Here are two examples of where government, even with its inefficiencies, can outperform private enterprise.

First, some activities are natural monopolies. Relying upon government avoids the excess profits that monopolies (and even oligopolies, which are markets dominated by just a handful of suppliers) seek to extract. Providing cellphone and broadband internet access are presently examples of natural monopolies. A friend with whom I discussed this issue told me about a friend of his who had better cellphone and broadband access in Afghanistan's Swat valley than in Maryland and Virginia. If that anecdotal evidence is insufficient to change your thinking (and doubting the persuasiveness of anecdotal evidence is always a good idea), then carefully examine this table compiled using OECD data:

BROADBAND SPEED
BROADBAND PRICES
 
 
Nation
Median advertised download speed in thousands of megabits per second, Sept. 2012
 
 
Nation
Lowest subscription prices in each country, in dollars per megabit per second of advertised speed, Sept. 2012.
South Korea
75.0
Greece
$1.25
Netherlands
61.4
Turkey
1.12
Denmark
40.0
Spain
.74
Britain
35.8
Italy
.64
Sweden
30.7
Ireland
.61
Spain
30.7
Austria
.56
Portugal
30.7
United States
.53
France
30.7
Switzerland
.47
Canada
30.7
Portugal
.46
Greece
24.6
Germany
.40
Australia
24.6
Czech Rep.
.40
Czech Rep.
23.0
Britain
.39
Italy
20.5
Canada
.39
Austria
20.5
Denmark
.36
Australia
Japan
19.5
.34
United States
16.9
France
.23
Germany
16.0
South Korea
.22
Finland
15.4
Finland
.22
Sweden
Turkey
10.2
.11
Switzerland
10.0
Netherlands
.08
Ireland
8.2
Japan
.04

Clearly, the US, the world leader in developing the internet and broadband technology, has failed in making that technology readily and affordably available.

Second, research indicates that in 2011 Medicare and Medicaid fraud cost US taxpayers something between $82 and $272 billion dollars. The problem is not government inefficiency or ineptitude but an unnecessarily expensive and convoluted healthcare system that invites fraud. As bank robber Willie Sutton replied when asked why he robbed banks, "That's where the money is." $272 billion is 10% of US spending on healthcare and 1.7% of US GDP (Gross Domestic Product).

The solution recommended by the editors of The Economist, which is not exactly a left-wing publication? Streamline healthcare delivery by establishing a national healthcare system. ("That’s where the money is," The Economist, May 31, 2014) Healthcare is a natural monopoly because few consumers have the knowledge to make intelligent choices about providers and treatments; furthermore, consumers often seek healthcare in times of crises, when time is critical, and trust providers to do what is right. Both of those factors keep consumers from making the type of informed choices upon which free markets depend for effective functioning. Therefore, healthcare providers often become de-facto monopolists or oligopolists, charging exorbitant rates in the absence of meaningful competition.

1 comment:

George Clifford said...

A reader sent these comments, adding nuance to my post:

The thing to remember is that the USA is less densely populated than South Korea or the European nations. Even Australia has the majority of its population in a few metropolitan areas; 90% of Canadians live within 100 miles of the USA border. Broadband speeds are more difficult to maintain as the distance of the connection to the central office increases. This is a consequence of physics. It can be overcome with electronics – but at a cost.
Internet speeds in the major USA cities are not much different than in the highly ranked countries, although I’d add that almost no one’s home router can cope with an Internet connection that is faster than 50 mb/s. What drags down the USA averages are areas like North Carolina along and east of I-95, aside from Wilmington and Fayetteville.