I’ve tried to pay pretty close attention to the Supreme Court’s debate on the legality of the Affordable Care Act, but the legal issues all seem quite a muddle to me. The economics, however, at least should be a lot more clear. Unfortunately, that’s not the case with a few of the justices, as this must-read piece by economist Henry Aaron explains.
You can’t understand the market failure that the ACA targets if you don’t understand the negative externalities caused by that market failure. On this point, Aaron writes:
Perhaps the most glaring instance of the failure to appreciate what an externality really is came from Justice Alito who at one point challenged the solicitor general by positing that the cost of all of the care currently used by those who are uninsured is less than would be the cost of the insurance they would be forced to carry. That being the case, Alito asked, how can one say that the uninsured are shifting costs to the insured? This query is painfully detached from an understanding of what an externality really is, how insurance works, or what the impact of insurance would be on service use.
Put aside that no one questions whether the uninsured are shifting costs to the insured, or that those costs could fairly be offset by “internalizing the externality,” i.e., mandating coverage. According to Justice Alito’s logic, anyone can impose a cost on me, my family, and everyone else, as long as that cost is less than the price of offseting it.
That betrays a fundamental misunderstanding of a pretty simple concept that the clever justice is trying to make way too complicated. And that should freak you out a bit as to what’s going on across town here in DC.