Health Economics – SOCE3B11 – Autumn 04/05
Lecture 19: Externalities & Health
Richard SmithReader in Health Economics
School of Medicine, Health Policy & Practice
Health Economics – SOCE3B11 – Autumn 04/05
Overview of lecture
What are ‘externalities’? Positive externalities and health Negative externalities and health ‘Global’ externalities and health Externalities and public goods
Health Economics – SOCE3B11 – Autumn 04/05
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
Health Economics – SOCE3B11 – Autumn 04/05
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)
Health Economics – SOCE3B11 – Autumn 04/05
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
Positive Externality
QA
P
Equilibrium Price PA
Q
D = MPB
S = MPC = MSC
A
Positive Externality
QAEquilibrium Output
P
Equilibrium Price PA
Q
D = MPB
S = MPC = MSC
A
Positive Externality
QAEquilibrium Output
P
Equilibrium Price PA
Consumer Surplus
Producer Surplus
Q
D = MPB
S = MPC = MSC
A
Positive Externality
QAEquilibrium Output
P
Equilibrium Price PA
Consumer Surplus
Producer Surplus
Q
D = MPB
MSB
S = MPC = MSC
A
Positive Externality
QAEquilibrium Output
P
Equilibrium Price PA
Consumer Surplus
Producer Surplus
Q
B
D = MPB
MSB
S = MPC = MSC
A
QBHerd immunity (eg 80% coverage)
Positive Externality
QAEquilibrium Output
P
Equilibrium Price PA
Consumer Surplus
Producer Surplus
QB Economically Efficient Output
Q
B
D = MPB
MSB
S = MPC = MSC
A
Positive Externality
QAEquilibrium Output
P
Equilibrium Price PA
Consumer Surplus
Producer Surplus
QB Economically Efficient Output
Q
B
D = MPB
MSB
S = MPC = MSC
A
Positive Externality
QAEquilibrium Output
P
Equilibrium Price PA
Consumer Surplus
Total Gain to Other People
Producer Surplus
QB Economically Efficient Output
Q
B
D = MPB
MSB
S = MPC = MSC
A
Positive Externality
QAEquilibrium Output
P
Equilibrium Price PA
Consumer Surplus
Total Gain to Other People
Producer Surplus
QB Economically Efficient Output
Q
B
D = MPB
MSB
S = MPC = MSC
A
Positive Externality
QAEquilibrium Output
P
Equilibrium Price PA
Consumer Surplus
Total Gain to Other People
Deadweight Social Loss
Producer Surplus
QB Economically Efficient Output
Q
B
D = MPB
MSB
S = MPC = MSC
A
Health Economics – SOCE3B11 – Autumn 04/05
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
Health Economics – SOCE3B11 – Autumn 04/05
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)
Health Economics – SOCE3B11 – Autumn 04/05
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
Equilibrium with a Negative Externality
Quantity
Price/ Cost
D (MPB/MSB)
S (MPC)
Equilibrium with a Negative Externality
Quantity
Price/Cost
A
D (MPB/MSB)
S (MPC)
QA
EquilibriumPrice PA
Equilibrium with a Negative Externality
Quantity
Price/ Cost
A
D (MPB/MSB)
S (MPC)
MSC
QA
EquilibriumPrice PA
Equilibrium with a Negative Externality
Quantity
Price/ Cost
B
A
D (MPB/MSB)
S (MPC)
MSC
QB QA
EquilibriumPrice PA
Equilibrium with a Negative Externality
Quantity
Price/ Cost
B
A
D (MPB/MSB)
S (MPC)
MSC
Equilibrium Output
QB QA
EquilibriumPrice PA
Equilibrium with a Negative Externality
Quantity
Price/ Cost
B
A
D (MPB/MSB)
S (MPC)
MSC
Economically Efficient Output Equilibrium Output
QB QA
EquilibriumPrice PA
Health Economics – SOCE3B11 – Autumn 04/05
Deadweight Social Losses From Smoking
D
MSC
Q
P
MPC = S
Health Economics – SOCE3B11 – Autumn 04/05
Deadweight Social Losses From Smoking
D
MSC
PA = £3
Q
A
P
MPC = S
QA
Health Economics – SOCE3B11 – Autumn 04/05
Deadweight Social Losses From Smoking
D
MSC
PA = £3
£10
Q
A
P
MPC = S
QA
Health Economics – SOCE3B11 – Autumn 04/05
Deadweight Social Losses From Smoking
D
MSC
PA = £3
£10
Q
A
P
MPC = S
QA
Health Economics – SOCE3B11 – Autumn 04/05
Deadweight Social Losses From Smoking
D
MSC
PA = £3
£10
Q
A
P
Deadweight Social Loss
MPC = S
QA
Health Economics – SOCE3B11 – Autumn 04/05
Deadweight Social Losses From Smoking
B
D
MSC
QB
PB = £5
PA = £3
£10
Q
A
P
Deadweight Social Loss
MPC = S
QA
Health Economics – SOCE3B11 – Autumn 04/05
Deadweight Social Losses From Smoking
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
Health Economics – SOCE3B11 – Autumn 04/05
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)
Health Economics – SOCE3B11 – Autumn 04/05
Taxation
A
D
Old MPC
Q
P
Health Economics – SOCE3B11 – Autumn 04/05
Taxation
A
D
Old MPC
New MPC = MSC
Q
P
Health Economics – SOCE3B11 – Autumn 04/05
Taxation
QB
PB = £5B
A
D
Old MPC
New MPC = MSC
Q
P
Health Economics – SOCE3B11 – Autumn 04/05
Taxation
QB
PB = £5B
A
D
Old MPC
New MPC = MSC
Q
P
PS = £2
Health Economics – SOCE3B11 – Autumn 04/05
Taxation
QB
PB
B
A
D
Old MPC
New MPC = MSC
Q
P
PS
Tax = £3
Health Economics – SOCE3B11 – Autumn 04/05
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
Health Economics – SOCE3B11 – Autumn 04/05
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
Health Economics – SOCE3B11 – Autumn 04/05
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)
Health Economics – SOCE3B11 – Autumn 04/05
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
Health Economics – SOCE3B11 – Autumn 04/05
‘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
Health Economics – SOCE3B11 – Autumn 04/05
‘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
Health Economics – SOCE3B11 – Autumn 04/05
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
Health Economics – SOCE3B11 – Autumn 04/05
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!
Health Economics – SOCE3B11 – Autumn 04/05
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.