Public Plan and the Health Care Wedge

Today’s edition of the Maneater featured an op-ed attacking the notion that a public option in health care is necessary to keep health care costs in this country low. From the article:

Indulge me in a very simplified thought experiment. You, reader, enjoy beer, and I have deep pockets. We come to an arrangement: you pay me a fixed fee, and I will heavily subsidize each of your purchases of beer over the course of a night.

What would we expect to see happen? I expect that your demand for beer will increase toward over-consumption since the more you use this service, the more attractive the deal becomes. Perhaps an astute bartender notices the strength of your demand and decides to react by raising the price of each beer by 25 percent. As far as you are concerned, you continue to pay the same as before. As far as the bartender is concerned, he’s reacting rationally to forces of supply of demand. As far as I’m concerned, I’m going to have to raise the price of my fee for future nights if I’m going to keep from losing money.

The price of beer will balloon and the culprit is an economic wedge — the difference between the price a consumer pays and a producer receives.

Applying the analogy to health care, we can see that a public option would produce unintended consequences of health care cost inflation by exacerbating the effects of an economic wedge in the health care market. Sounds a lot like the conclusion of this recent Show-Me Institute study.