The purpose of this article is to reconsider the foundations of health economics as applied to the study of competition. It shows that conclusions concerning the purported desirability of competitive markets are based on a number of assumptions—many of which have heretofore been ignored—that typically are not fulfilled in the health care area. Once this is recognized, market mechanisms no longer necessarily provide the best way to improve social welfare.

The article is divided into two parts: competition and demand. Each of these sections presents and then critiques key assumptions of the conventional economic model, and then provides a number of health applications. It concludes that by not considering the validity of these assumptions in health care applications, researchers and policy analysts will blind themselves to policy options that may be most effective in improving social welfare.

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