A Free Market in Kidneys: Efficient and Equitable.

• Author: BARNETT, WILLIAM II

More than one thousand Americans die prematurely every year because they cannot get kidney transplants. In addition, more than forty thousand others suffer while waiting for kidney transplants (United Network for Organ Sharing 1999). Fortunately, this health-care problem--for those involved, a crisis and a calamity--could be virtually eliminated because its cause is clear and a solution is available.

The problem persists even though our medical knowledge and technology and our supplies of appropriately trained medical personnel and relevant equipment are more than adequate for the performance of the number of transplants that would eliminate it. The problem persists solely because of an insufficient number of transplantable kidneys, an insufficiency that exists because both the purchase and the sale of kidneys arc criminal acts under the National Organ Transplant Act of 1984 (U.S. Congress 1984). Economists have shown that legalization of purchases and sales of kidneys would increase the number of kidneys available for transplant.(1) However, they maintain that although the increased number of kidneys available for transplant would reduce the magnitude of the current insufficiency, some insufficiency would remain (Adams, Barnett, and Kaserman 1999; Anderson and Barnett 1999; Barnett, Blair, and Kaserman 1992; Barney and Reynolds 1989; Blair and Kaserman 1991; Block 1988; Carlstrom and Rollow 1997; Hansmann 1989; Kaserman and Barnett 1991; McKenzie and Tullock 1989; Rottenberg 1971; Schwindt and Vining 1986).

That the governmental prohibition of the purchase and sale of kidneys results in the unnecessary suffering and premature death of thousands of people is an undeniable truth. The obvious question is, Why does this prohibition remain in force? The literature provides three answers.

First, those who benefit from the current system prefer the status quo. Therefore, they engage in rent-seeking behavior to maintain the prohibition against the purchase and sale of kidneys (Barnett 1988; Barnett, Beard, and Kaserman 1993; Barnett and Kaserman 1995; Barney and Reynolds 1989).

Second, wealthy people who need a kidney would bid up the price of the limited supply in order to acquire one for themselves. Therefore, the "poor" would be priced out of the market and have to do without a transplant. Moreover, to allocate such an essential scarce good on the basis of wealth is morally repugnant (Barnett, Beard, and Kaserman 1993; Barnett, Blair, and Kaserman 1992; Blair and Kaserman 1991; DeJong et al. 1995).

Third, if a free market for kidneys existed, only poor individuals would sell kidneys, and such sales would be coercive in nature. A market for an essential body part in which only the poor would be the sellers, and coerced sellers at that, is morally outrageous (Barnett, Beard, and Kaserman 1993; Barnett, Blair, and Kaserman 1992; Blair and Kaserman 1991; DeJong et al. 1995).

We agree with the first answer, which is well developed in the literature. Our primary purpose of this paper is to refute the second answer by correcting the faulty economic analysis on which it rests. We also refute, with a more complete economic analysis, the third answer.

The Demand for Kidneys and Economic and Medical Shortages

It is necessary to distinguish two possible meanings of shortage. The first is the customary meaning in economics, which we refer to as an "economic shortage." The second, which we refer to as a "medical shortage," we define as a situation in which. regardless of whether or not an economic shortage exists, someone who needs a kidney transplant cannot get one because no transplantable kidney is available. The current literature explains why, without the prohibition against commercial transactions in kidneys, the economic shortage would be completely eliminated. However, it also maintains that because even in a free market the opportunity cost of the marginal kidney would, at some point, exceed the demand price, some people who needed a kidney transplant would still have to do without. Thus, although there would be no shortage in the economic sense, a medical shortage would exist.(2) This proposition is the faulty analytical basis of the notion that with a free market for kidneys only the rich would receive transplants and of the normative conclusion that allocating such an essential scarce resource on the basis of wealth is morally repugnant.

The key point to be made here is that in addition to eliminating the economic shortage, a free market in kidneys, in conjunction with the current system of financing transplants, would also eliminate the medical shortage.(3) That is, no person who could benefit physically from a kidney transplant would need to go without one.(4) This outcome results from the conjunction of two factors. First, because only a tiny fraction of the more than 270 million Americans requires a kidney transplant, the need is extremely limited quantitatively. Second, the federal government is the de facto payer-of-last-resort for virtually all kidney transplants. Together, these two factors cause the demand curves for transplants and hence for the requisite kidneys to be truncated at a price greater than the opportunity cost of providing the marginal transplant and its requisite kidney.(5) Consequently, the demand for transplants and hence for kidneys can be satiated.

Our analysis is illustrated in figures 1 and 2. Figure 1 illustrates the situation in which the purchase and sale of kidneys are legally prohibited. The demand curve for kidneys when there is a third-party payer-of-last-resort is [D.sub.2]. At [Q.sub.MAX], the maximum number of kidneys medically needed, that demand curve is truncated (that is, the demand becomes perfectly inelastic) at a price greater than zero. The demand curve for kidneys when there is no third-party payer-of-last-resort is [D.sub.1]. Because some individuals who need kidneys are very poor, that curve meets the quantity axis at a price of zero, indicating that the marginal demander of a kidney would not be able to pay any price.(6) The supply curve for kidneys ([S.sub.K]) is truncated at the maximum quantity of donated kidneys; that is, it is perfectly elastic at the price of zero up to the maximum quantity donated, at which point it becomes perfectly inelastic. At the price of zero, there is both economic and medical shortage of kidneys equal to the difference between the maximum number of kidneys needed and the number donated ([Q.sub.MAX] - [Q.sub.P=0]). Finally, at the quantity of kidneys donated, the demand price exceeds the supply price, indicating the existence of rent and hence attendant rent-seeking behavior.

[Figures 1-2 ILLUSTRATION OMITTED]

The reality today is that the demand for kidneys is subsidized because the federal government acts as a third-party payer-of-last-resort. Figure 2 illustrates the situation of a free market for kidneys in the presence of a such a third-party payer-of-last-resort. The demand curve ([D.sub.2]) is the same, as in the case of the legally prohibited market for kidneys. However, the supply curve is different. It would no longer be truncated at the quantity of donated kidneys;(7) rather, from that point on, the quantity supplied would increase in response to offers of higher prices. The market would "clear" in the sense that the quantity supplied would equal the quantity demanded at [Q.sub.MAX]. However, at that quantity, the demand price would exceed the supply price, indicating the existence of rent and attendant rent-seeking behavior. However, because the market would clear at [Q.sub.MAX], there would be neither economic shortage nor medical shortage. Every person who needed a kidney...