Theories of the price and quantity of physician services. A synthesis and critique

Abstract

In the traditional neoclassical model of supply and demand, prices determine the allocation of economic resources. The difficulty in applying this model to physician services is the rationing of resources directly by physicians themselves, eliminating the allocative function of prices. Welfare consequences are appropriately judged in terms of efficiency and equity, not departures from the structural relationships implied by supply and demand. As interpreted here, both competitive theories and target-income theories of this market imply that physicians consider both their own welfare and the welfare of their patients in their decision-making. All consumer benefits and all producer costs are internalized by physicians. They consequently have an incentive to obtain the maximum possible social benefit from the resources at their disposal, to the extent that they are (implicitly) allowed to share in the resulting social gains. The distribution of gains between patients and physicians is determined by professional ethics within bounds imposed by competitive forces.