A friend of mine, Jelena, gave me the idea for this post. As graduate students and most American students are wont to do, I try my best to buy used books when I can to save precious currency for other, more valuable things. The advent of Ebay and Half.com is a blessing for us, reducing information asymmetry and transaction costs, thereby leading to lower prices (Case in point: my dynamics book. List price $100+, price I paid: $35, including shipping).
So, today, I met Jelena, an undergrad econ student, while walking to the library. She was carrying a plastic bag full of books for the semester ahead of her. After the usual New Year pleasantries, she happened to mention that her books for 3 classes cost her $500. Aiming to educate this helpless student, obviously new to the American way, I attempted to enlighten her on the benefits of online textbook purchases. She proceeded to tell me that she was well aware of this exotic means of transaction, but her government (read the taxpayers of Montenegro) was paying for her education and books, as a result of which she proceeded to buy brand new, amazingly expensive versions of the texts. (As an aside, what a sweet deal! For her, anyway.)
When people spend somebody else's money, they are less likely to account for the efficacy of their purchases. The same goes for consumers of healthcare (and government, but that's another topic). In the US, most insured do not face the full cost of their treatment, leading them to purchase the most exotic and expensive services, as well as an inefficiently higher amount of even basic services, driving up prices for the entire economy. This is just one piece of America's healthcare puzzle.