ABSTRACT
There has been an increasing awareness in the health economics literature that the application of the conventional theory of demand to health and health care is misleading. The characteristics of uncertainty and informational impactedness of the commodity health care, as introduced in chapter 3, have a fundamental effect upon demand analysis in the sector. The usual economic approach is to specify the consumer as sovereign and relate demand to willingness to pay, constrained by the tangible role of budget considerations. Uncertainty is managed by expression of von Neumann-Morgenstern expected utility maximisation and market analysis continues through the study of supply in the light of the specified demand constraints. The existence and nature of the information impactedness in health care is such that, although the consumer remains strictly sovereign over the basic utility choices, in that it is only the consumer who can convert health status changes into utility gains or losses, he lacks the necessary information over the technical relationship between health care and health status to make consistent preference comparisons as well as the information which would allow him to define the expected ex post state of the world. This information is relevant to both the direct consumption of health care and the investment effects of that consumption. Health care is, of course, a heterogeneous commodity. Nevertheless it may still be suggested that health care is broadly bad in consumption, in that its consumption per se involves disutility. There are few people who, in the normal course of events, would willingly consume health care purely for its consumption effects on their utility function. Information on the form of health care necessary for its investment effects is required, however, to allow the consumer to evaluate net utility and make rational choices.
