This article was originally published by Ryan McMaken at Mises Institute
When governments subsidize goods and services — or provide them directly through government-owned institutions — the effect is to lower the price to consumers, thus increasing demand.
Put another way: if the price of, say, a college education is near-zero to the consumer, then consumers are likely to demand a college education in much higher numbers than if the price were higher.
The same principle, of course, holds in health care or any other good or service. If junk food were “free” to everyone in America, Americans would be even more rotund than they already are. Unfortunately, many have already learned this from experience with food stamps .
In a market-based system, goods and services are demanded in accordance with the prices of goods available. If the price of a college degree is very high, then demand will be small. If providers want to sell their services to more people, they must find a way to provide the service at a lower price. Fortunately, goods are not homogeneous, and the history of capitalism is one in which entrepreneurs have sought tireless to provide a wide variety of substitute goods at a wide variety of price levels. While it’s true not everyone can afford a BMW, a great many people can afford a Toyota, which for many of us, are sufficiently safe, and sufficiently reliable.
On the other hand, if providers can gain access to the taxpayers’ dollars via taxation, then they need not drive down the costs of providing the service in order to drive down prices. Providers can simply collect taxpayer funds via the public purse, and not bother with finding ways to deliver goods and services more cheaply.