chapter  7
16 Pages

The demand for health—a household production theory approach

A major conceptual advance in the analysis of the demand for health care has been the recognition that the fundamental demand by the consumer is for health and not health care per se. The demand for health care is a derived demand. A similar proposition holds for the demand for health insurance. However, it may also be argued that for certain purposes the demand for health is also a derived demand. Health is demanded not just for its own sake but also to enable individuals, for example, to participate in the labour market. This small, but influential insight was utilised in an important study by Grossman (1972a, 1972b) which represents a direct application to the demand for health and health care of the new theories of consumer demand. Such theories were themselves important extensions of the neoclassical approach to consumption theory. The earlier, revealed preference approach, resting upon the individual’s taste not changing and a number of simple accompanying assumptions, demonstrated that demand could be analysed simply through observing how a consumer’s purchases varied with prices and incomes. These assumptions, as they relate to choice under uncertainty, were outlined in chapter 3, where it was noted that they imposed severe limitations upon the economic analysis of the commodity health care. In particular the informational requirements demanded of the consumer and the associated problems relating to the uncertainty of consumption were seen to be central to the consideration of this commodity. Unfortunately, as we shall see, the application of the new theories of consumer demand to the demand for health have failed to resolve these basic problems, although they have generated a substantial literature.