Friday, August 21, 2009

Health care - positive externalities

That basic health care is a public good and provides considerable positive externalities, and will therefore have to be supplied by the government is widely accepted. Now here comes more examples of its positive externalities.

A CEPR study which finds that small business activity to be marginal in the US, considered the home of entrepreneurial capitalism, has provoked various explanations for the surprising finding, prominent being the role of high health care costs in the US.



About the reasons for the low self-employment rates in the US, the study writes,

"One plausible explanation for the consistently higher shares of self-employment and small-business employment in the rest of the world’s rich economies is that all have some form of universal access to health care. The high cost to self-employed workers and small businesses of the private, employer-based health-care system in place in the United States may act as a significant deterrent to small start-up companies,12 an experience not shared by entrepreneurs in countries with universal access to health care."


Paul Krugman makes this interesting punchline, "We’re not independent free spirits; on the contrary, we’re more likely than Europeans to be cubicle rats working for big employers." NYT has this op-ed which makes the case for universal health care and its importance in lowering costs for small businesses. The reforms proposed by the Obama administration like the setting up of health insurance exchanges would enable smaller firms to buy helth insurance plans for their employees at the same cost as larger firms.

Contrast this low level of small business activity in the US with India, whose cities have been found to be teeming with entrepreneurial spirit. Interestingly, here too the absence of additional health care costs for their employees may also be an important contributing factor to the proliferation of small businesses. However, in this case, the government is not bearing the health care burden and there is no clear and enforceable mandate on the employees to do so. In the circumstances, the workers are left to fend for themselves, with profoundly adverse implications for the society and economy as a whole.

Update 1
The US Secretary of Commerce makes his case in support of universal health insurance as beneficial to both small employers and their employees.

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