| Go to | The Economics of Health Care |
| Unit 3. The case against a free market |  |
Page 30 |
| 3 |  |
|
| vi. Externalities |  |
|
|
|
| Externalities or spillover effects provide another source of market failure. Again the problem is related to information. This time the market price does not accurately contain all the information about the benefits and costs of the market transaction. Earlier we outlined how this might occur when a consumer bought a CD. Now we are interested in how this might operate in a health care market. Vaccinations Suppose vaccination against infectious diseases were bought and sold through a free market. |
 Figure 12. |
| In Figure 12 on the left, DD shows the market demand for vaccinations. The amount of vaccination that private individuals will be prepared to buy at each price will depend upon their estimate of their personal benefit from being protected against whooping cough. In formal terms this means that DD represents the marginal private benefit (MPB) that consumers receive. The market supply of vaccinations is shown by SS. The free market equilibrium is at price P' giving Q' vaccinations. However, when you are vaccinated against whooping cough you are not the only person to benefit. Other people also gain because they are now protected against catching whooping cough from you. This extra or externality benefit is missed by the free market. We can show the effect of this on the diagram. MSB represents the marginal social benefit from vaccination, that is all the benefits received by society. MSB is made up of all the private benefits consumers receive (MPB) plus the additional externality benefits. The Pareto efficient equilibrium is E" which corresponds to Q'' vaccinations. A free market will thus under-provide vaccinations and this in turn will impose a cost upon society. This societal cost is shown in the diagram by the shaded area E'FE" which equals the excess of MSB over the cost of producing the further Q" – Q' vaccinations. |
 People are prepared to make charitable donations to fund medical care for others because they gain utility from helping others. |
| "Selfish" versus "caring" externalities
Some economists refer to this type of externality as a 'selfish' externality to distinguish it from a 'caring' externality. A 'caring' externality occurs when individuals receive benefit from knowing that other people are receiving medical treatment. Knowing that someone is in pain simply because they cannot afford medical treatment makes many people upset. In other words, the poor sick person's pain and lack of treatment causes disutility for other people in society. Now look at these (check the status bar for information)
|
|||||||||||||||
|