A free market in kidneys would be efficient and equitable: a case of too much romance.

• Author: Brooks, Michael
• Position: Comment

With regard to the recent Independent Review article by William Barnett II, Michael Saliba, and Deborah Walker, "A Free Market in Kidneys: Efficient and Equitable" (2001), one might complain that the title misleads the reader to expect that the authors will ground their case against the current, regulated market on a comparison with a completely unfettered market. Rather than doing so, however, they base much of their argument on the assumption that the government acts as a third-party payer-of-last-resort. A more helpful title might have been "An Efficiency and Equity Case for a Market and Public Intervention in Kidneys" or "A Mixed Case of Private and Public Provision for Kidney Transplants." My present criticism of the article, however, goes beyond a mere charge that the authors chose a misleading tide. I show that their efficiency and equity case founders on an overly romantic view of the government: if feasibility is taken seriously and social optimality in public-sector provision is satisfied, then their strong conclusion--that "a free market ..., in conjunction with third-party payers, would eliminate the ... [inefficient and inequitable] effects of the current system.... [where t]he medical shortage ... would be eliminated, and everyone who could benefit physically from a kidney transplant would receive one" (2001, 383)--in general no longer holds. (1)

To see what is at stake here, consider my figure 1, which is a variant of their figure 2. (2) Under the regulated outcome, the number of kidneys supplied equals the number donated voluntarily, [Q.sub.R.] The "market"-clearing price occurs at [P.sub.4, the intersection of the regulated supply curve and the demand curve, which represents the government acting as a third-party payer-of-last-resort--that is, at the intersection of [S.sup.R.sub.P] and [D.sub.E]. If kidneys can be bought and sold on a voluntary market, then the amount of kidneys coming onto the market will be responsive to price. The competitive equilibrium output is [Q.sub.C], and the market-clearing price is [P.sub.l]. As Barnett, Saliba, and Walker point out, not all the individuals who require a kidney will be able to acquire one on the competitive market. The medical shortage is represented by the number of kidneys that would be demanded at a zero price and by the number supplied under competition; that is, the medical shortage is ([Q.sub.MAX]-[Q.sub.C]). Barnett, Saliba, and Walker acknowledge the potential inequity of the medical shortage evident at the market outcome, but they go on to argue that

[FIGURE 1 OMITTED]

a free market in kidneys, in conjunction with the current system of financing transplants, would also eliminate the medical shortage.... [T]he federal government is the de facto payer-of-last-resort for virtually all kidney transplants.... [T]he demand curve for transplants and hence for the requisite kidneys [is] truncated at a price greater than the opportunity cost of providing the marginal transplant and its requisite kidney. Consequently, the demand for transplants and hence for kidneys can be satiated. (2001, 375, emphasis in original) In terms of my figure 1, the government's demand for kidneys is represented by the truncated demand curve DE. The government acting as a third-party payer-of-last-resort is prepared to pay up to Ps for the marginal kidney, and all individuals who require a kidney receive one. (3) Barnett, Saliba, and Walker see no need to make any trade-off between efficiency and equity. The mixed case of public and private provision efficiently satisfies their notion of equity. It is not difficult to see, however, that their claim fails as a result of taking an overly romantic view of the forces behind government intervention and of the cost of public provision.

Barnett, Saliba, and Walker's argument is highly problematic on at least two grounds. First, there is no reason why the amount the government is prepared to pay currently as a third-party payer-of-last-resort coincides with the amount the collectivity would be prepared to pay in some normative sense. Part of the difficulty in interpreting the authors' argument is that they do not provide any additional explanation of what the demand curve [D.sub.E] entails. Barnett, Saliba, and Walker do not go much beyond the assertion that currently the government is prepared to act as the third-party payer-of-last-resort for virtually all transplanted kidneys and that this readiness is captured in the truncated demand curve. Although they are unclear about what the truncated demand curve represents, a moment's reflection reveals what the curve must reflect in order for their claims to be substantiated. As long as one adheres to...