Lecture 19: Externalities & Health

Health Economics – SOCE3B11 – Autumn 04/05

Lecture 19: Externalities & Health

Richard SmithReader in Health Economics

School of Medicine, Health Policy & Practice


Overview of lecture

What are ‘externalities’? Positive externalities and health Negative externalities and health ‘Global’ externalities and health Externalities and public goods


What are ‘externalities’?

Costs and/or benefits of actions by one party which affect other parties

Externalities exist wherever a transaction affects an uncompensated party

Policy issue – design of appropriate institutions & legislation to align individual incentives & social welfare Externalities (with public goods) are main

reason for public health care systems worldwide


Positive externality

Positive externality – where social benefit of consumption of good exceeds private benefit

Private benefit – benefit to consumers who buy and consume good

Social benefit – benefit to all in society, including those who do not consume it

Equals private benefit of consumption plus benefit to others

Causes market failure (too little consumption)


Positive externalities & health

Caring for health of others (Good Samaritan) interdependent utility functions UA=U(hA, yA, hB); UB=U(hB, yB, hA), where

h=health, y=income (other goods) Private health increases national wealth Knowledge & technology Communicable disease surveillance &

infectious disease control (Lecture 21) Vaccination (herd immunity effect)

Positive Externality

P

Q

D = MPB

S = MPC = MSC


QA

P

Equilibrium Price PA

Q

D = MPB

S = MPC = MSC

A


QAEquilibrium Output

P


Q

D = MPB

S = MPC = MSC

A



P


Consumer Surplus

Producer Surplus

Q

D = MPB

S = MPC = MSC

A



P


Consumer Surplus

Producer Surplus

Q

D = MPB

MSB

S = MPC = MSC

A



P


Consumer Surplus

Producer Surplus

Q

B

D = MPB

MSB

S = MPC = MSC

A

QBHerd immunity (eg 80% coverage)



P


Consumer Surplus

Producer Surplus

QB Economically Efficient Output

Q

B

D = MPB

MSB

S = MPC = MSC

A



P


Consumer Surplus

Producer Surplus


Q

B

D = MPB

MSB

S = MPC = MSC

A



P


Consumer Surplus

Total Gain to Other People

Producer Surplus


Q

B

D = MPB

MSB

S = MPC = MSC

A



P


Consumer Surplus


Producer Surplus


Q

B

D = MPB

MSB

S = MPC = MSC

A



P


Consumer Surplus


Deadweight Social Loss

Producer Surplus


Q

B

D = MPB

MSB

S = MPC = MSC

A


Policy options

(Pigouvian) subsidies to ‘internalize’ external benefit changing private benefits so they equal

social benefits, such as providing ‘free’ vaccines

Direct provision of good, such as vaccine

Property rights to ‘correct’ market (e.g A ‘owns’ right not to be vaccinated, or B owns right to vaccinate) – UK vs USA schools


Negative externality

Negative externality – where social cost of consumption of good exceeds private cost

Private cost – cost to consumers who buy and consume good

Social cost – cost to all in society, including those who do not consume it

Equals private cost of consumption plus cost to others

Causes market failure (too much consumption)


Negative externalities & health

Infectious disease Large part of reason behind public health

movement in 19th Century (UK=PHLS/HPA; USA=PHS/CDC)

Lecture 21 – antibiotic resistance Environmental degradation (vehicle

emissions) Child day care

individual vs social costs and benefits Tobacco & passive smoking

Equilibrium with a Negative Externality

Quantity

Price/Cost


Quantity

Price/ Cost

D (MPB/MSB)

S (MPC)


Quantity

Price/Cost

A

D (MPB/MSB)

S (MPC)

QA

EquilibriumPrice PA


Quantity

Price/ Cost

A

D (MPB/MSB)

S (MPC)

MSC

QA

EquilibriumPrice PA


Quantity

Price/ Cost

B

A

D (MPB/MSB)

S (MPC)

MSC

QB QA

EquilibriumPrice PA


Quantity

Price/ Cost

B

A

D (MPB/MSB)

S (MPC)

MSC

Equilibrium Output

QB QA

EquilibriumPrice PA


Quantity

Price/ Cost

B

A

D (MPB/MSB)

S (MPC)

MSC

Economically Efficient Output Equilibrium Output

QB QA

EquilibriumPrice PA


Deadweight Social Losses From Smoking

D

MSC

Q

P

MPC = S



D

MSC

PA = £3

Q

A

P

MPC = S

QA



D

MSC

PA = £3

£10

Q

A

P

MPC = S

QA



D

MSC

PA = £3

£10

Q

A

P

MPC = S

QA



D

MSC

PA = £3

£10

Q

A

P


MPC = S

QA



B

D

MSC

QB

PB = £5

PA = £3

£10

Q

A

P


MPC = S

QA



NOTE – the economically efficient level of production is not zero!It would mean doing completely without goods yielding some benefit

Economically efficient level occurs when marginal benefit of reducing externality equals the marginal cost of reducing it

Policy issue is how to achieve this level


Policy options

(Pigouvian) taxation to ‘internalize’ external cost (e.g. cigarettes, petrol) changing private costs so they equal social costs

Regulation of overall quantity produced (rationing e.g. cigarettes, petrol)

Property rights to ‘correct’ market (e.g. A ‘owns’ right to clean air, or B owns right to pollute air – determines flow of compensation, subsidy, tax etc)


Taxation

A

D

Old MPC

Q

P


Taxation

A

D

Old MPC

New MPC = MSC

Q

P


Taxation

QB

PB = £5B

A

D

Old MPC

New MPC = MSC

Q

P


Taxation

QB

PB = £5B

A

D

Old MPC

New MPC = MSC

Q

P

PS = £2


Taxation

QB

PB

B

A

D

Old MPC

New MPC = MSC

Q

P

PS

Tax = £3


Problems with taxation

Taxation may not internalize all externalities (demand subject to other influences)

Taxation can internalize externalities only if transactions costs (implementing the taxation system) are sufficiently low Coase theorem


Coase Theorem

Equilibrium is economically efficient regardless of who holds property rights – producer or consumer – when transactions costs are low

BUT: Equilibrium not economically efficient when transactions costs are high – depends on property rights, laws etc


Regulation

Direct government intervention to determine quantity of production/consumption (rather than indirectly through price) Though incentives/quota’s (e.g. vaccine targets,

incentive payments to GPs, congestion charge) Through legislation (e.g. smoking in public

places) Through production/distribution (e.g.

communicable disease surveillance)


Problems with Regulation

Costs may differ between firms and/or consumers which may not be accounted for

Uncertainty over MSB/MPB and MSC/MPC curves (required to set optimal equilibria)

Political costs Transaction costs


‘Global’ externalities & health

Communicable diseases HIV/AIDS – global (geographic & demographic) Tuberculosis - global (geographic &

demographic) Malaria - regional (geographic) Acute Respiratory Infection, Diarrhoea – local

(geographic & demographic) Economic effects of ill-health

HIV/AIDS in Southern Africa – regional to global


‘Global’ externality – (re)emerging infectious diseases 1996-2003

Cryptosporidiosis

Lyme BorreliosisReston virus

Venezuelan Equine Encephalitis

Dengue haemhorrhagic fever

Cholera

E.coli O157

West Nile Fever

Typhoid

Diphtheria

E.coli O157

EchinococcosisLassa feverYellow fever

Ebola haemorrhagic fever

O’nyong-nyong fever

Human Monkeypox

Cholera 0139

Dengue haemhorrhagic fever

Cholera

RVF/VHF

nvCJD

Equine morbillivirus

Hendra virus

BSE

Multidrug resistant Salmonella

E.coli non-O157

West Nile Virus

Malaria

Nipah Virus

Reston Virus

Legionnaire’s Disease

Buruli ulcer

SARS

W135

SARS


Cost of global health externalities

World Health Organization

Economic impact, selected infectious disease Economic impact, selected infectious disease outbreaks, 1990outbreaks, 1990––19991999

UKUK——BSEBSEUS$ > 9 billionUS$ > 9 billion

19901990--19981998

UR TANZANIA Cholera

US$ 36 millionUS$ 36 million19981998

INDIAINDIA——PlaguePlagueUS$ 1.7 billion, US$ 1.7 billion,

19951995

PERUPERU——CholeraCholeraSeafood Seafood

Export BarriersExport Barriers19911991

MALAYSIAMALAYSIA——NipahNipahPig destruction, 1999Pig destruction, 1999

HONG KONG SARHONG KONG SARInfluenza A (H5N1) Influenza A (H5N1)

Poultry destruction, 1997Poultry destruction, 1997

USAUSA——E. coli 0157E. coli 0157Food recall/Food recall/destructiondestruction

PeriodicPeriodic


Externalities & public goods

Goods with significant positive externalities are often public goods

Goods with significant negative externalities are, conversely, public ‘bads’

Public goods (bads) are under (over) consumed for additional reasons

Lecture 20!


Further references

McPake B, Kumaranayake L, Normand C (2002), Health Economics: an International Perspective. London: Routledge. Chapter 8.

Getzen T (2004). Health Economics: fundamentals and flow of funds. New York: Wiley. Chapter 15.

Smith RD, Coast J. Controlling antimicrobial resistance: a proposed transferable permit market. Health Policy, 1998; 43: 219-232.

Coast J, Smith RD, Millar MR. An economic perspective on policy to reduce antimicrobial resistance. Social Science & Medicine, 1998; 46: 29-38.

For future ref: Smith, RD, Drager N. Cross-border risks and public health

security. Oxford University Press. Smith RD, Drager N, Hardimann M. The rapid assessment of the

economic impact of public health emergencies of international concern. World Health Organization.

Yeung RYT, Smith RD. Can we use contingent valuation to assess the private demand for childhood immunization in developing countries? Applied Health Economics and Health Policy.

Documents

Lecture 19: Externalities & Health