Transcript Lecture 19 - The Economics Network

Lecture 19: Externalities & Health
Richard Smith
Reader 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)
Health Economics – SOCE3B11 – Autumn 04/05
Positive Externality
P
S = MPC = MSC
D = MPB
Q
Positive Externality
P
S = MPC = MSC
Equilibrium
Price PA
A
D = MPB
QA
Q
Positive Externality
P
S = MPC = MSC
Equilibrium
Price PA
A
D = MPB
Equilibrium Output
QA
Q
Positive Externality
P
S = MPC = MSC
Consumer
Surplus
Equilibrium Producer
Price PA
Surplus
A
D = MPB
Equilibrium Output
QA
Q
Positive Externality
P
S = MPC = MSC
Consumer
Surplus
Equilibrium Producer
Price PA
Surplus
A
MSB
D = MPB
Equilibrium Output
QA
Q
Positive Externality
P
S = MPC = MSC
Consumer
Surplus
Equilibrium Producer
Price PA
Surplus
B
A
MSB
D = MPB
Equilibrium Output
QA
QB
Q
Herd immunity (eg
80% coverage)
Positive Externality
P
S = MPC = MSC
Consumer
Surplus
Equilibrium Producer
Price PA
Surplus
B
A
MSB
D = MPB
Equilibrium Output
QA
QB
Q
Economically
Efficient Output
Positive Externality
P
S = MPC = MSC
Consumer
Surplus
Equilibrium Producer
Price PA
Surplus
B
A
MSB
D = MPB
Equilibrium Output
QA
QB
Q
Economically
Efficient Output
Positive Externality
P
Total Gain to
Other People
Consumer
Surplus
Equilibrium Producer
Price PA
Surplus
S = MPC = MSC
B
A
MSB
D = MPB
Equilibrium Output
QA
QB
Q
Economically
Efficient Output
Positive Externality
P
Total Gain to
Other People
Consumer
Surplus
Equilibrium Producer
Price PA
Surplus
S = MPC = MSC
B
A
MSB
D = MPB
Equilibrium Output
QA
QB
Q
Economically
Efficient Output
Positive Externality
P
Deadweight
Social Loss
Total Gain to
Other People
Consumer
Surplus
Equilibrium Producer
Price PA
Surplus
S = MPC = MSC
B
A
MSB
D = MPB
Equilibrium Output
QA
QB
Q
Economically
Efficient Output
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
Health Economics – SOCE3B11 – Autumn 04/05
Equilibrium with a Negative
Externality
Price/
Cost
Quantity
Equilibrium with a Negative
Externality
Price/
Cost
S (MPC)
D (MPB/MSB)
Quantity
Equilibrium with a Negative
Externality
Price/
Cost
S (MPC)
Equilibrium
Price PA
A
D (MPB/MSB)
QA
Quantity
Equilibrium with a Negative
Externality
Price/
Cost
MSC
S (MPC)
Equilibrium
Price PA
A
D (MPB/MSB)
QA
Quantity
Equilibrium with a Negative
Externality
Price/
Cost
MSC
B
S (MPC)
A
Equilibrium
Price PA
D (MPB/MSB)
QB
QA
Quantity
Equilibrium with a Negative
Externality
Price/
Cost
MSC
B
S (MPC)
A
Equilibrium
Price PA
D (MPB/MSB)
QB
QA
Quantity
Equilibrium Output
Equilibrium with a Negative
Externality
Price/
Cost
MSC
B
S (MPC)
A
Equilibrium
Price PA
D (MPB/MSB)
QB
Economically Efficient Output
QA
Quantity
Equilibrium Output
Deadweight Social Losses From
Smoking
P
MSC
MPC = S
D
Q
Health Economics – SOCE3B11 – Autumn 04/05
Deadweight Social Losses From
Smoking
P
MSC
MPC = S
PA = £3
A
D
QA
Health Economics – SOCE3B11 – Autumn 04/05
Q
Deadweight Social Losses From
Smoking
P
MSC
£10
MPC = S
PA = £3
A
D
QA
Health Economics – SOCE3B11 – Autumn 04/05
Q
Deadweight Social Losses From
Smoking
P
MSC
£10
MPC = S
PA = £3
A
D
QA
Health Economics – SOCE3B11 – Autumn 04/05
Q
Deadweight Social Losses From
Smoking
P
MSC
£10
PA = £3
Deadweight
Social Loss
MPC = S
A
D
QA
Health Economics – SOCE3B11 – Autumn 04/05
Q
Deadweight Social Losses From
Smoking
P
MSC
£10
PB = £5
Deadweight
Social Loss
MPC = S
B
A
PA = £3
D
QB
QA
Health Economics – SOCE3B11 – Autumn 04/05
Q
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
P
Old MPC
A
D
Q
Health Economics – SOCE3B11 – Autumn 04/05
Taxation
New MPC = MSC
P
Old MPC
A
D
Q
Health Economics – SOCE3B11 – Autumn 04/05
Taxation
New MPC = MSC
P
Old MPC
PB = £5
B
A
D
QB
Health Economics – SOCE3B11 – Autumn 04/05
Q
Taxation
New MPC = MSC
P
Old MPC
PB = £5
B
A
PS = £2
D
QB
Health Economics – SOCE3B11 – Autumn 04/05
Q
Taxation
New MPC = MSC
P
Old MPC
PB
B
Tax = £3
A
PS
D
QB
Health Economics – SOCE3B11 – Autumn 04/05
Q
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
Legionnaire’s Disease
Multidrug resistant
Salmonella
Cryptosporidiosis
E.coli O157
SARS
BSE
E.coli non-O157
Typhoid
Malaria
E.coli O157
nvCJD
West Nile Virus
Reston virus
Lassa fever
Yellow fever
Lyme Borreliosis
Venezuelan
Equine Encephalitis
Dengue
haemhorrhagic
fever
Diphtheria
West Nile
SARS
Fever
Echinococcosis
W135
Nipah Virus
Buruli ulcer
Ebola
haemorrhagic
fever
Cholera
Cholera 0139
RVF/VHF
O’nyongnyong fever
Reston Virus
Dengue
haemhorrhagic
fever
Human
Monkeypox
Cholera
Equine
morbillivirus
Health Economics – SOCE3B11 – Autumn 04/05
Hendra virus
Cost of global health externalities
Economic impact, selected infectious disease
outbreaks, 1990–1999
USA—
USA—E. coli 0157
Food recall/
destruction
Periodic
UK—
UK—BSE
US$ > 9 billion
19901990-1998
HONG KONG SAR
Influenza A (H5N1)
Poultry destruction, 1997
INDIA—
INDIA—Plague
US$ 1.7 billion,
1995
PERU—
PERU—Cholera
Seafood
Export Barriers
1991
UR TANZANIA
Cholera
US$ 36 million
1998
MALAYSIA—
MALAYSIA—Nipah
Pig destruction, 1999
World Health Organization
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.
Health Economics – SOCE3B11 – Autumn 04/05