Government Intervention and Inequality: Question 8

Worked solution

Part (a): What is direct provision?

Direct provision occurs when the government itself produces and supplies a good or service, taking over the role usually played by private firms, rather than simply intervening in a market that remains privately run. It is typically funded out of general taxation and made available free (or at a low, uniform price) at the point of use. A common example, other than healthcare, is state education: the government directly employs teachers and runs schools, rather than only subsidising private schools.

Part (b): Two reasons direct provision might raise consumption more than a subsidy

1. It removes price as a barrier entirely. Under direct provision, primary healthcare is free at the point of use, so even a household with very little income can consume it without needing to find any money at the time of treatment. Under a subsidy, the clinic’s price falls but does not normally reach zero, so the poorest households may still be priced out of consulting a doctor, even though the price is now lower than before.

2. It guarantees where the good is actually supplied. With direct provision, the government decides directly where to build clinics and can deliberately locate them in poorer or remote areas with the greatest need. A subsidy only changes the incentives facing existing private clinics. If opening a clinic in a low-income area remains commercially unattractive even after the subsidy (for example, because of low ability to pay for any extra, unsubsidised services, or high costs), private providers may still choose not to locate there, leaving supply gaps that a subsidy alone cannot fix.

Part (c): Discussing the extent to which direct provision is more effective

Case for direct provision. By making primary healthcare free at the point of use, direct provision removes the financial barrier facing low-income households completely, rather than merely reducing it. Because the government controls location decisions directly, it can also guarantee clinics are built in the areas where under-consumption is worst, which a subsidy cannot guarantee since private clinics remain free to choose their own location.

Limitations of direct provision. Direct provision must be funded through taxation, which has an opportunity cost, either higher taxes elsewhere in the economy or less government spending on other priorities. Without a market price to balance supply and demand, a zero price can also cause quantity demanded to exceed the capacity the government has built, leading to queues and waiting lists; some low-income patients might therefore still fail to receive timely treatment, just rationed by time instead of money. Removing the profit motive may also weaken incentives for clinics to control costs or improve quality compared with private clinics competing to attract subsidised patients.

Case for the subsidy alternative. A subsidy preserves competition and patient choice between private clinics, which can maintain pressure on quality and efficiency, and is usually quicker and administratively simpler for a government to introduce than building an entire new network of directly provided clinics. Its main weakness is that a positive price still remains, so it may not fully solve under-consumption among the very poorest households, and clinics may still choose to locate where it is most profitable rather than where healthcare need is greatest.

Judgement. Direct provision is likely to be more effective than a subsidy specifically at raising consumption among the very lowest-income households, since it is the only one of the two policies that removes the price barrier completely and can guarantee supply reaches under-served areas. However, its overall effectiveness depends heavily on whether tax-funded capacity is large enough to meet demand at a zero price. If not, rationing by waiting time may still leave some low-income patients under-treated, so direct provision is not guaranteed to succeed unless it is well funded and well managed.

Final answers

• (a) Direct provision $=$ the government itself producing and supplying a good/service, funded through taxation, e.g. state education.
• (b) (i) Removes price as a barrier completely (free at the point of use); (ii) guarantees clinics are located where needed, unlike a subsidy which relies on private clinics choosing to locate there.
• (c) Direct provision is likely more effective for the poorest households since it removes the price barrier entirely and can target under-served areas, but its success depends on sufficient tax-funded capacity to avoid rationing by waiting time; a subsidy preserves competition but still leaves a positive price.