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TH1E
AMERICAN
ECONOMIC
REVIEW
VOLUME
LIII
DECEMBER
1963
NUMBER
5
UNCERTAINTY AND THE
WELFARE
ECONOMICS OF
MEDICAL CARE
By
KENNETH J.
ARROW*
I.
Introduction:
Scope
and Method
This
paper
is an
exploratory and
tentative study of
the specific
differentia
of
medical care
as the
object of normative
economics.
It
is contended
here, on the
basis of
comparison of
obvious
characteris-
tics of the
medical-care
industry with
the norms
of
welfare
economics,
that
the
special
economic
problems of
medical care
can be
explained
as
adaptations
to
the
existence of
uncertainty in the
incidence
of dis-
ease and in
the
efficacy of
treatment.
It
should
be noted that
the subject is
the medical-care
industry,
not
health.
The
causal factors
in
health are
many,
and
the provision
of
medical
care is
only one.
Particularly at low levels
of
income,
other
commodities such as
nutrition, shelter,
clothing,
and
sanitation
may
be
much
more
significant.
It
is the
complex
of services that
center
about the
physician, private
and
group
practice,
hospitals,
and
public
health,
which I
propose
to
discuss.
The focus of
discussion will be
on
the way the
operation of
the
medical-care
industry
and
the efficacy with
which it
satisfies the needs
of
society
differ from a
norm,
if
at all. The "norm"
that
the econo-
mist usually
uses for the
purposes
of
such
comparisons
is
the
operation
of a
competitive
model,
that
is,
the
flows
of
services
that would
be
*
The
author
is
professor
of economics
at
Stanford
University. He
wishes to express
his
thanks for useful comments
to
F.
Bator,
R.
Dorfman,
V.
Fuchs,
Dr.
S.
Gilson,
R.
Kessel,
S.
Mushkin,
and
C. R.
Rorem. This
paper
was
prepared
under
the
sponsorship
of the Ford
Foundation
as
part
of
a
series of
papers
on the economics of
health,
education,
and