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I guess I thought this was fairly obvious, but maybe not.  Here’s libertarian Alex Tabarrok offering a defense of including a public option as part of any healthcare reform:

If insurance companies must take all customers regardless of pre-existing conditions it is obvious that sooner or later and probably sooner the government will require that everyone purchase health insurance.

In short, insurance reform will mean that everyone will be required to buy a product that will be tightly regulated and more homogeneous.  Both of these factors will increase the market power of insurance firms.  Since escape via non-purchase will no longer be a potential response to higher prices, mandatory purchase will reduce the elasticity of demand giving firms an incentive to increase prices.

….It’s true that mandatory purchase doesn’t necessarily lead to market power, auto insurance is quite competitive.  Nevertheless, given the potential of insurance reform to increase the market power of insurance firms the search for some disciplining device like the public option is reasonable.

The healthcare bills currently on the table are huge windfalls for insurance companies.  That’s why the industry supports them.  It gives them more power and it ensures them more customers.  Liberals who back this approach are basically doing it because we figure that’s just the way the world works: if you want the support of a big, powerful player, you have to bribe them.  And that’s what we’re doing.

But yes: if we’re doing this, a “disciplining device” that gives customers a greater choice of insurance options is indeed reasonable.  Even from a conservative point of view, it’s reasonable.  There’s a limit to just how big the bribe should be.

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