Private markets work well in most circumstances, but insurance markets - especially those in health care - are an exception. Whether or not you think the recent health care bill was a good idea, there is a big problem we need to solve.
In most markets people know what they are buying and selling. When you buy insurance you are paying somebody else to take responsibility for your risk, but neither you nor the insurance company know exactly what that risk is. In essence, the insurer is betting that they won't have to pay for as much as they collect in premiums.
To do this, they need to make sure they don't insure too many sick people. People who choose not to buy insurance tend to be young and healthy, but those who think they need health insurance are exactly the clients the insurers don't want. This creates what economists call a "lemons" problem, in the same way that used cars with serious problems have owners very willing to sell them.
This is one reason why so many people get their insurance through their work. The employer gets a more loyal workforce, but the insurer gets a pool of customers that tend to be relatively healthy. Insurers also can use their size to negotiate cheaper prices with doctors and hospitals.
But uninsured people get sick and have accidents, too. If the uninsured are able to pay out of pocket, they will pay much higher prices than insured people do. If they can't afford it, they often get treated in the emergency rooms of public hospitals. Some are forced into bankruptcy. These unpaid costs are passed on through higher prices to the insured.
Insurance premiums rise as a result, and when some employers can no longer afford to insure their workers, more costs are passed on to those who still have insurance. The rising number of uninsured contributes to rising health care costs for us all. When people get sick and can't get treated, they are less likely to return to work and pay taxes, and they become a burden on the rest of us. Those on Medicaid force those costs onto taxpayers.
Free markets won't solve this problem, unless we are willing to put our sick and injured on melting ice floes. We require every driver to have liability insurance, so that others don't have to bear the costs of their accidents. Requiring everybody to have health insurance means that everybody shares in the burden, and also solves the lemons problem. The new health care law may or may not be the right tool, but the failure of private health insurance is nonetheless real.
• Professor Elliott Parker is the incoming chairman of the Economics Department at the University of Nevada, Reno.