Arrow’s Medical Intervention

Kenneth Arrow passed away on 21 Feb-ruary 2017. His research delved into some complex economic and ethical issues facing the health sector. No professor teaching a course on health finance or health insurance can ignore the seminal work of Arrow, titled, “Uncertainty and the Welfare Economics of Medical Care,” published in the American Economic Review (December 1963, Vol 53, No 5, pp 941–73). This paper is a classic, and is widely cited. This paper was one of the first readings of the course on health insurance that I offered at the Indian Institute of Management (IIM), Ahmedabad during 2014–16.

One of the issues the economists throughout have been dealing with is the problem of allocation of resources. Following the first optimality theorem (popularly known as the Pareto criterion), an allocation of resources is “optimal” if one cannot rearrange things in a way that makes any person better-off without making at least one person worse off. Further, economic theory suggests that if some underlying assumptions of perfect competition and consumers having full knowledge are true, then the free market will produce an efficient allocation of resources. The consumer supremacy ensures that they are in a commanding position subject to their budget constraints.