What is the Root Cause of Cost Disease?


The cost of education, professional services, and healthcare has risen dramatically

The Baumol effect is a can of worms because people look for a single intellectually-satisfying explanation, but, in reality, there are unsatisfyingly many core reasons for cost disease across different industries that produce a similar effect of rising costs.

Another point to add to the mix, which I haven’t seen mentioned:

  • Even if the raw service is cheap, prices remain high in fields where consumers can’t easily measure outcomes (e.g. dentistry, healthcare, education, cosmetic surgery). Why wouldn’t there be enough demand for a $10 dentist? Because consumers wouldn’t know if it was any good. Why are wouldn’t a cheap consultant accumulate all the customers of an equally-skilled expensive consultant? Because the customer can’t tell who is better. Price is used as a proxy for an outcome measurement, and when there is a better public measurement of outcome, prices will fall.