No Hot Water, Cheap Healthcare - Who Pays?

Arnold Kling joins Alex Tabarrok in a renewed effort to teach us that there is no free lunch. If you use it you pay for it - or even worse, if the lunch is free you probably pay too much. Let me first thank these prominent teachers and economists for this deep insight. Let me then thank Arnold Kling for his good class on TCS on the so called "adverse selection" problem. Even though he seemingly fail to recognize the huge adverse selection costs for individual insurance policies, he identifies them when they arrive, though much diminished, on the scale of an employer's pool. Nevertheless, he gets to the conclusion of having a public insurance system. It has to be smallish, Arnold tells us, but without explanation.

Could the explanation be that having a part of the population living with little health care and no hot water should be viewed as a freedom of choice opportunity? A feature rather than a bug in the capitalist world? Do economists in general think that most people in advanced societies that happen to find themselves with no more than basic health care in apartments without hot water have done so thanks to their own rational choices? Have they tried to calculate the costs arising due to the difficulties that children born into those people's families might experience in fully exploiting their own possibilities to make rational decisions? What about criminality, isn't this sort of population more likely to be recruited by organized crime? Isn't crime generally extremely expensive to any economy?

Isn't it likely that policies that deprive the poorest in an advanced society of what the rest view as basic necessities will end up being expensive for all? No hot water, cheap healthcare - who pays?