Shortages Can Always Be Solved by Market Prices

American Enterprise Institute scholar Sally Satel’s article “Kidney Mitzvah: Israel’s Remarkable New Steps to Solve Its Organ Shortage” appeared this week in Slate. Here's a summary:

Israel is taking bold measures to address its severe organ shortage. With the introduction of two new laws, Israeli families that allow their deceased loved one’s organs to be donated can receive money for a funeral or other memorial, and anyone who agrees to be a posthumous donor gets priority in the event of needing an organ transplant himself. Other countries should follow Israel’s lead and implement initiatives that provide incentives for organ donation.

Other countries like...... maybe the United States? We face a huge organ shortage that continues to worsen every year under current policy, which makes it illegal to provide any financial compensation for organ donors.

The charts above clearly illustrate the worsening situation for those on the growing waiting list for kidneys in the United States. The top chart shows that at the end of 2009, there were more than 83,000 patients on the waiting list, setting a new record for the total number of candidates waiting for kidneys in any year. Also, the kidney waiting list increased by almost 5,000 in 2009, setting another record for the largest annual increase in history for the kidney waiting list.

Kidney transplant operations for 2009 are currently available only through October from the United Network for Organ Sharing, but the projections based on year-to-date counts suggest that about 16,940 kidney transplant operations will take place in 2009. As the graph above shows, the annual number of transplant operations has remained relatively flat at between 16,000 to 17,000 since 2004, while the waiting list has grown by almost 23,000 in the last five years. What that means of course is that the chances for those on the growing waiting list to actually receive a kidney keep fading every year, and more and more people die waiting.

The bottom chart displays the ratio of the number of candidates on the kidney waiting list in a given year to the number of actual kidney transplant operations in that year, and shows the worsening situation for those waiting for a transplant. As recently as 1997, there were three candidates waiting for each kidney transplant operation, but that ratio has almost doubled, to six candidates waiting in 2009 (based on data through October) for every transplant operation. Stated differently, the chances of getting a kidney while on the waiting list have fallen almost in half over the last 12 years, from about a 33 percent chance in 1997 to only a 17 percent chance in 2009.

The historical trends clearly demonstrate that current U.S. policies are failing miserably to address the growing kidney shortage, and the situation is getting worse every year. Maybe we can learn something from Israel’s new policies that provide incentives, including “compensation-for-memorialization,” to increase organ donation in the United States.

Or how about just allowing direct cash payments? Economics 101 tells us that shortages are always caused by artificially low prices (zero in the case of organs), and can always be eliminated by market pricing ($36,000 is the price that has been proposed in Singapore).

Here's what we know for sure: Relying on altruism for organs and a price of $0 results in a huge shortage, with demand exceeding supply by a factor of almost 6:1. At some price, let's say $1 million, there would probably be a huge kidney surplus, with supply exceeding demand. At some market-determined, market-clearing price somewhere between $0 and $1 million per kidney, there would be no surpluses, no shortages, and market equilibrium (Qd = Qs). And that would be the best possible outcome, since it would eliminate the waiting list, and in the process eliminate the needless deaths that now occur at the rate of about 12 per day for kidney candidates.