One of the simplest economic concepts to understand is the theory of demand. As the price of a good to users decreases, demand or use of that good will increase. As the price of a good approaches zero, theoretically the demand or use of the good will approach infinity. Nowhere is this principle better demonstrated than healthcare.

Here are some simple anecdotes from my past. In the 1950s, doctors made house-calls and charged nominal amounts for their services ($10 seems to be a number I remember).

In 1966 I dislocated my shoulder in a charity alumni football game and was whisked to the hospital by ambulance. X-rays and re-positioning the shoulder were required. My father paid all the fees out of pocket. I am not sure what the cost was, but my father did not carry around great amounts of money. My guess would be in the $40 - $50 range.

In 1976, our four-year old son was awake all night with an ear problem, which ended with bleeding from the ear. My wife and I were panicked, especially because we had located to a new city only that week. The next morning (Sunday), we called a neighbor and received a recommendation for a pediatric practice. The doctor made a special visit to the office at 2:00 that afternoon and saw our child. The cost was $15.00.

So, what happened to our healthcare system? Medicare and Medicaid were instituted and that separated the price from the actual cost of the service. Government involvement soon expanded to the point that the market for healthcare ceased to be a free market. While prices to consumers were driven down via Medicare and other third-party payers, costs were not. Demand increased dramatically, as the services were almost "free," at least to the user.

The following information, posted by Glenn Reynolds , shows what happened over time:

VERONIQUE DE RUGY: The High Cost of No Price: A simple chart will help you understand why healthcare spending has gone out of control. "Economists have shown that if a good's price is zero or decreasing, then the demand for this good will likely increase. In 2008, consumers were only directly responsible for 11.9 percent of total national healthcare expenditures, down from 43 percent in 1965, according to new data from the U.S. Department of Health and Human Services. This means that someone other than consumers pays roughly 88 percent of all healthcare costs, giving consumers little incentive to mind costs and much incentive to over-consume."

Now we are on the verge of making the problem worse with the implementation of so-called health care reform. Believing that the price we pay is the same as the cost of a product is a common economic fallacy. P.J. O'Rourke colorfully described the problem:

If you think health care is expensive now, wait until you see what it costs when it's free.

O'Rourke, based solely on this observation, should be inducted into the quote Hall of Fame.

Monty Pelerin www.economicnoise.com