Does the Geographical Distribution of Physicians Reflect Market Failure

Public policy toward the geographic distribution of physicians presumes that the market fails because physicians can create their own demand. A number of government interventions attempt to correct this market failure. We derive several predictions about physical location behavior from standard location theory (i.e., assuming the market does not fail). The data generally support these predictions. At a theoretical level the ability of physicians to induce demand is neither necessary nor sufficient to demonstrate that physicians will locate only in large cities as their numbers increase. The premises of public policy toward the geographic distribution of physicians need rethinking.