Externalities in Health

LECTURE 5

DR. DEVI
 Overview of lecture

What are ‘externalities’?

Positive externalities and health
Negative externalities and health
‘Global’ externalities and health
Externalities and public goods
Economics of scale
 What are ‘externalities’?

Costs and/or benefits of actions by one party

which affect other parties is known as
externalities.
Externalities exist wherever a transaction affects
an uncompensated party
 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.
Vaccination (herd immunity effect).
 Policy options

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)
Antibiotic resistance
Environmental degradation (vehicle emissions)
Child day care
 individual vs social costs and benefits
Tobacco & passive smoking
 ‘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
 Externalities & public goods

Goods with significant positive externalities are

often public goods.
Goods with significant negative externalities are,
conversely, public ‘bads’
 Economics of scale

Economies of scale, in microeconomics, refers to

the cost advantages that an enterprise obtains due to
expansion. There are factors that cause a producer’s
average cost per unit to fall as the scale of output is
increased. "Economies of scale" is a long run concept
and refers to reductions in unit cost as the size of a
facility and the usage levels of other inputs increase.
Diseconomies of scale are the opposite. The common
sources of economies of scale are purchasing (bulk
buying of materials through long-term contracts),
managerial (increasing the specialization of
managers), financial (obtaining lower-interest
charges when borrowing from banks and having
access to a greater range of financial instruments),
marketing (spreading the cost of advertising over a
greater range of output in media markets), and
technological (taking advantage of returns to scale in
the production function
Each of these factors reduces the
long run average costs (LRAC) of production by
shifting the
short-run average total cost (SRATC) curve down
and to the right. Economies of scale are also derived
partially fromlearning by doing.
 Economies of scale is a practical concept that may explain
real world phenomena such as patterns of international
trade, the number of firms in a market, and how firms get "
too big to fail." The exploitation of economies of scale helps
explain why companies grow large in some industries. It is
also a justification for free trade policies.
 since some economies of scale may require a
larger market than is possible within a particular
country — for example, it would not be efficient for
Liechtenstein to have its own car maker, if they
would only sell to their local market. A lone car
maker may be profitable, however, if they export
cars to global markets in addition to selling to the
local market. Economies of scale also play a role in
a "natural monopoly.
As quantity of production increases from Q to Q2, the average cost of each
unit decreases from C to C1.
 thanks