QUARTERLY JOURNAL OF ECONOMICS adequate health is a precondition for employment. At the same time this means that medical insurance is least available to those who need it most, for the insurance companies do their own"ad verse selecti This adds one major argument in favor of medicare. On a cost benefit basis medicare may pay off for it is quite possible that every individual in the market would be willing to pay the ex pected cost of his medicare and buy insurance, yet no insurance cof afford to sell him a policy-for at any price it will attract too many"lemons. The welfare economics of medicare, in this view, is exactly analogous to the usual classroom argument for public expenditure on roads. B. The Employment of Minorities The Lemons Principle also casts light on the employment of minorities. Employers may refuse to hire members of minority groups for certain types of jobs. This decision may not reflect rationality or prejudice- but profit maximization. For race may serve as a good statistic for the applicant's social background, abilities Good quality schooling could serve as a su statistic; by grading students the schooling system can give a better indicator of quality than other more superficial character- istics. As T. w. Schultz writes. The educational establishment discovers and cultivates potential talent. The capabilities of chil- dren and mature students can never be known until found and culti- vated. 6(Italics added. An untrained worker may have valuable natural talents, but these talents must be certified by the educa- tional establishment "before a company can afford to use them. The certifying establishment, however, must be credible; the unrelia bility of slum schools decreases the economic possibilities of their students This lack may be particularly disadvantageous to members of how 五-tem again taken from an insurance textbook, shows dical insurance market is from perfect competition ccident and health insur nce, Principles and Practices, New York: The Ronald Press, 1957, pp urance is not a commodity for sale on the open market Colum- downloaded from 220.248.61 69 on Sat, 18 Nov 2017 16: 26: 51 UTC Allusesubjecttohttp://about.jstor.org/term494 QUARTERLY JOURNAL OF ECONOMICS adequate health is a precondition for employment. At the same time this means that medical insurance is least available to those who need it most, for the insurance companies do their own "ad- verse selection." This adds one major argument in favor of medicare.5 On a cost benefit basis medicare may pay off: for it is quite possible that every individual in the market would be willing to pay the ex- pected cost of his medicare and buy insurance, yet no insurance company can afford to sell him a policy - for at any price it will attract too many "lemons." The welfare economics of medicare, in this view, is exactly analogous to the usual classroom argument for public expenditure on roads. B. The Employment of Minorities The Lemons Principle also casts light on the employment of minorities. Employers may refuse to hire members of minority groups for certain types of jobs. This decision may not reflect ir- rationality or prejudice -but profit maximization. For race may serve as a good statistic for the applicant's social background, quality of schooling, and general job capabilities. Good quality schooling could serve as a substitute for this statistic; by grading students the schooling system can give a better indicator of quality than other more superficial character- istics. As T. W. Schultz writes, "The educational establishment discovers and cultivates potential talent. The capabilities of chil- dren and mature students can never be known until found and culti- vated." 6 (Italics added.) An untrained worker may have valuable natural talents, but these talents must be certified by "the educa- tional establishment" before a company can afford to use them. The certifying establishment, however, must be credible; the unrelia- bility of slum schools decreases the economic possibilities of their students. This lack may be particularly disadvantageous to members of 5. The following quote, again taken from an insurance textbook, shows how far the medical insurance market is from perfect competition: is . .insurance companies must screen their applicants. Naturally it is true that many people will voluntarily seek adequate insurance on their own initiative. But in such lines as accident and health insurance, companies are likely to give a second look to persons who voluntarily seek insurance without being approached by an agent." (F. J. Angell, Insur- ance, Principles and Practices, New York: The Ronald Press, 1957, pp. 8-9.) This shows that insurance is not a commodity for sale on the open market. 6. T. W. Schultz, The Economic Value of Education (New York: Colum- bia University Press, 1964), p. 42. This content downloaded from 220.248.61.69 on Sat, 18 Nov 2017 16:26:51 UTC All use subject to http://about.jstor.org/terms