Chapter Eight: The Economics of Regulation

1) Why regulations:
a- The theory of the second best, state that if one market distortion exists, then
introducing another imperfection (regulation) can improve the final
outcome. This explains why the health sector is one of the most extensively
regulated in many market economies.

b- Equity: Regulations may be needed to improve equity in the provision of

health services. Moreover, inequality is normally associated with
inefficiency, priorities, and social welfare.

2) What is Regulation:
Regulation takes place when government intervenes to effect individual
activities. Intervention could be through price control or quantity control
-:and we can distinguish between three types of intervention
a- Legal restriction: through legislations to limit the price of health services.

b- Intervention through the use of incentives such as monetary and non-

monetary incentives.

c- Intervention to regulate incentives through the use of taxes and subsidies.

3) Regulation in the case of health sector:-

-:Intervention may take one of the following forms
a- Control the entry and exit of providers in health sector.

b- Intervention through licensing, hiring rules, medical equipment and new

drug licensing.

c- Control the degree of competition and ensure higher level of social welfare.
( consumer surplus)

d- Control the prices and fees for health services, also payment (salaries) to
health professionals.

e- Control quantity such as staff, budget, and equipments training. This is to

prevent duplication of service and cut waste.

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 f- Control of quality: for medicine and for the level of service. This is
normally done through accreditation for health institutions and health staff.
The process of accreditation provides incentive for hospital and other health
service institutions to improve its quality of service.

g- Control to ensure safety: - by adopting a safety code for different type of

health institutions.

4) Some short comings for regulatory intervention:-

a- Transaction costs:
Enforcing regulations implies high costs for implementation and monitoring.

b- Rent-seeking behavior:
People who make high revenue (profit) will try to avoid regulations and
keep making high rent (profit).
,For example, the high tax on tobacco may lead to a black market
.lower actual price, and lower tax revenue for the government

c- Informational asymmetries:
This means that health institutions may give misleading information
to the regulator. That is why it is difficult to predict the impact of
regulatory intervention without knowledge of market structure, cost
conditions, rent- seekers, and transaction costs, asymmetric of
information, moral hazard and economies of scale. All of these
factors represent obstacles to creating an efficient regulated health
.system

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