Demand curves slope down

The recent controversy over the Obama administration's mandate that everyone's contraceptives be paid in full by their insurance plans served to remind me once again what so many people seem to blatantly ignore: Demand curves slope down.

The demand curve for a product shows the relationship between the quantity people will purchase at each and every price, keeping constant everything else that may affect demand for that product.

Downward sloping means that if the price of something increases, people buy less of it. Conversely, if the price falls, they buy more of it, keeping people's tastes, prices of other related products, incomes etc constant.

Such a demand curve is illustrated below:

[ illustration of the demand curve in the market for something ]

For simplicity, I omitted the supply curve from the diagram.

The diagram tells us that the highest price anyone will pay for this product is P' dollars per unit per whatever time period we are considering and if the product were available for free, Q' units would be consumed.

If the current price in the market is P*, consumers will buy Q* units.

When the government passes a mandate saying that any consumer who wants something will have access to it through their insurance without paying a co-pay or deductible, that means consumers will face a price of $0/unit for this product.

That is, they will consume Q' units of this product.

They will spend nothing on it directly.

Of course, it still costs something to produce something.

The people who produce something have to be compensated. Who knows how much it costs to produce a unit of something?

Well, the producers do, of course. Without a government mandate that consumers have free access to something if they want it, the market mechanism would ensure that only those units whose value to the consumer exceeded the cost of producing the thing were ever produced, thereby utilizing the resources of the society most efficiently.

Now, someone has to figure out how much the producers of something have to be reimbursed for every unit that consumers use.

Obviously, the producers want the reimbursement to be high. Just as obviously, the people doing the reimbursing want it to be low. They both hire consultants, lobbyists, accountants, advertisers, public relations firms etc so that such reimbursement set at a favorable level to them.

The net result is a complete waste of the resources of the society over something which markets have no problem allocating efficiently so long as a bunch of producers are allowed to compete freely for the business of consumers.

That's why the debate over the Obama administration's mandate that all insurance plans make contraceptive available for free is not just an affront to the First Amendment, it is also a perfect example of the kind of waste generated by government mandates that things of all sorts be made available for free when they require real resources to produce them.

At the end of this wasteful process, somebody is going to come up with some reimbursement figure, that amount will be baked into everyone's insurance premiums. In the marketplace where producers compete for your business, more efficient producers have an incentive to undercut competitors. In the mandate scenario, as opposed to a competitive market, if better technology or more abundant resources make it cheaper to produce these goods, the producers will have no incentive to ask for a lower reimbursement.

That is only going to result in ballooning health care expenditures by a thousand mandates.

It is important to be against all mandates, not just the ones you personally find objectionable if you want to restore some semblance of sanity in the allocation of our resources.

If you'd like to comment on this, you can do so on my blog.