Health Economics – SOCE3B11 – Autumn 04/05
Lecture 20: Public Goods & Health
Richard SmithReader in Health Economics
School of Medicine, Health Policy & Practice
Health Economics – SOCE3B11 – Autumn 04/05
Overview of lecture
What is a ‘public good’? Is ‘health’ a public good? Importance of public goods for
health ‘Global’ public goods and health
Health Economics – SOCE3B11 – Autumn 04/05
Public goods
Goods which ‘market’ will not provide as: non-excludable (non-exclusive)
benefits of good freely available to all or prohibitively costly to provide good only to people who pay for it and prevent or exclude other people from obtaining it
non-rival in consumption (inexhaustible) quantity available for other people does not fall
when someone consumes it, such that the total cost of production does not increase as the number of consumers increases (MC of additional user = £0)
Public goods are NOT goods provided by the state (e.g. NOT public health systems!)
Health Economics – SOCE3B11 – Autumn 04/05
Examples of public goods
Defence Given size of armed forces may protect
population of 10, 20, 50 or 100 million people Law & order
Foreign visitor benefits from crime-free streets as much as local residents
Information Discovery of food additive that causes cancer –
cost borne once, then cost of dissemination so that all can benefit is (virtually) zero
Infectious disease surveillance (prevent epidemics)
Health Economics – SOCE3B11 – Autumn 04/05
Is health a public good?
Health per se is NOT a public good: one person’s health status primarily
benefits them goods and services necessary to provide
and sustain health are predominantly rival and excludable
BUT: are aspects that have PG aspects (e.g. communicable disease control - HPA)
Health Economics – SOCE3B11 – Autumn 04/05
Quasi-public goods
Public goods are rarely ‘pure’ – often: non-excludable but rival – ‘common
pool goods’ Beach on a bank holiday, car MoT test
non-rival but excludable – ‘club goods’ Satellite television signals, polio
vaccination Technology & geography determine
the degree of publicness (e.g. television & radio signals, street lights)
Health Economics – SOCE3B11 – Autumn 04/05
Public-private spectrum
Clubgoods
Publicgoods
Privategoods
Commonpool goods
Excludability
High Low
Hig
h
Low
Riv
alry
Health Economics – SOCE3B11 – Autumn 04/05
Access goods
Private goods are often required to access public goods (e.g. PC to access internet)
This restricts scope of the benefits from public goods and may lead to perverse targeting
To secure provision of some public goods required access goods may thus be considered as if they were public goods
Health Economics – SOCE3B11 – Autumn 04/05
Importance of public goods
Free markets under-supply public goods because: non-excludability leads to ‘free-riding’ non-rivalry leads to lower than socially
optimal consumption
Health Economics – SOCE3B11 – Autumn 04/05
Non-excludability & ‘free-riding’
A free-rider is someone willing (hoping) to let others pay for a public good they will consume (e.g. cure for cancer)
If everyone tries to be a free-rider, no one pays for the good to be produced
Leads to societal loss of welfare – everyone worse off = ‘prisoner’s dilemma’
Health Economics – SOCE3B11 – Autumn 04/05
Non-rivalry
Private good – rivalry means each unit only consumed by 1 consumer (↑ demand = ↑ quantity) Market demand = horizontal sum of demand
curves (sum of all quantities demanded at given price)
Public good – nonrivalry means each unit is consumed by all consumers (↑demand = ↔quantity) Market demand = vertical sum of demand curves
(sum of price each consumer WTP for single unit)
Health Economics – SOCE3B11 – Autumn 04/05
Private individual demand curve
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Private market demand curve
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Public quasi-demand curve
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Aggregate value of public good
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Dilemma of private supply of PGs
Firms may devise methods to reduce the non-excludability (free-rider) problem (e.g. encrypted TV signals - ‘club’ solution)
BUT: high costs associated with achieving this excludability means cost > benefit for any one consumer and non-rivalry thus means no production
Health Economics – SOCE3B11 – Autumn 04/05
Why no private production
Health Economics – SOCE3B11 – Autumn 04/05
Inefficiencies in private supply
Health Economics – SOCE3B11 – Autumn 04/05
Example PGH: medical research
Discovery of bacteria by Louis Pasteur began revolution in treatment of disease, saved wool industry from anthrax, improved brewing and dairy products
No single beneficiary (firm or consumer) obtains benefits sufficient to cover costs
Cost of research supported by (French) government
Underinvestment if beneficiaries do not pay
Health Economics – SOCE3B11 – Autumn 04/05
Central problem
Core policy issue is therefore one of ensuring collective action to facilitate production of, and access to, goods which are largely non-excludable and non-rival in consumption
Role usually assigned to government (although not exclusively - peer pressure, social responsibility, community, fairness)
Health Economics – SOCE3B11 – Autumn 04/05
Role for government
Public good aspects are often a rationale for government finance through:
Fees (e.g. prescription, dental). Still loss welfare as leads to inefficient exclusion where people excluded even though benefit>cost
‘Privatizing’ (excluding) a public good through establishing property rights - patent system
Direct finance, funded through general taxation Other financial incentives/compensation -
permits
Health Economics – SOCE3B11 – Autumn 04/05
Role for government
There are drawbacks associated with governmentally provided public goods There may still be welfare loss from ’free’
goods (depending on actual cost) Level of provision may be hard to determine -
problems in obtaining ‘social value’ (incentive to over/under state value – CBA replaces market pricing)
Government programs may reflect political pressure to benefit special-interest groups
Health Economics – SOCE3B11 – Autumn 04/05
Global public goods
Clubgoods
Publicgoods
Privategoods
Commonpool goods
Excludability
High Low
Hig
h
Low
Riv
alry
Glo
bal
Reg
iona
l
Nat
iona
l
Loc
al
Health Economics – SOCE3B11 – Autumn 04/05
What is a ‘global’ public good?
A public good with quasi-universal benefits in terms of: Countries - more than one group of countries People - accruing to several, preferably all,
population groups Generations - extending to both current &
future generations, or at least meeting needs of current without foreclosing development options for future generations
Rarely ‘pure’ - tend toward universality in benefiting more than one group of countries, population group and/or generation
Health Economics – SOCE3B11 – Autumn 04/05
Is health a ‘global’ public good?
Health is NOT a global public good: one nation’s health status primarily
benefits them goods and services necessary to provide
and sustain health are predominantly rival and excludable
BUT: are aspects that have global aspects E.g. communicable disease eradication
Health Economics – SOCE3B11 – Autumn 04/05
Global ‘Polio Eradication Initiative’
Inactivated poliovirus vaccine (IPV) & oral polio vaccine (OPV) eradicated polio in ‘West’, but remained a problem in developing nations
1988 World Health Assembly voted to eradicate
Non-rival - one person’s protection will not reduce another’s
Non-excludable - no limit to safety that eradication will offer - geographically or demographically
Health Economics – SOCE3B11 – Autumn 04/05
Poliomyelitis distribution 1988/2001
1988>125 countries
200110 countries
Health Economics – SOCE3B11 – Autumn 04/05
Practicalities of production
Effort required to eradicate polio correlated inversely with income (↑MC)
GPEI required substantial in-kind & financial contributions from endemic & polio-free countries, NGOs & private-public partnership
A number of ‘free riders’ remain
Health Economics – SOCE3B11 – Autumn 04/05
Donors to GPEI 1985-2001 (~$2bn)
US CDC
USAID
World Bank IDA Credit to Govt of India
United KingdomRotary International
Japan
Belgium Australia
Germany
Denmark
European UnionCanada
WHO Regular Budget
UNICEF
Netherlands
UN Foundation
Bill & Melinda Gates Foundation
Aventis Pasteur/IFPMAOther
Health Economics – SOCE3B11 – Autumn 04/05
What may be GPG for health?
Knowledge (and technologies)
Policy and regulatory regimes
Health systems (as key access goods)
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Example: Genomics (knowledge)
Genomics – study of organism’s entire genetic material (30-40,000 genes in humans)
Human Genome Project: involves research teams in 20 different countries >$3bn public sector funding ‘Bermuda Accord’ - data made publicly available within
24 hours Potential benefits:
Clinical diagnostics and predictive testing Identifying new treatment Developing preventive measures Direct economic benefits
Genomics is principally about knowledge – public good
Health Economics – SOCE3B11 – Autumn 04/05
GPG aspects of genomics
Applications Excludable ornon-excludable
Rival ornon-rival inconsumption
Level ofapplication
GPGHPotential
1. Individual ApplicationsDiagnosis of diseases (e.g. PCR for Dengue)Predictive tests (e.g BRAC for breast cancer) Excludable Rival Local NoVaccinesPharmacogenomics adapted to the individual2. Population ApplicationsScreening tests (e.g. for sickle cell disease) Local/national/Mass immunisation Mixed Mixed regional/global YesPharmacogenomics adapted to the population3. Other ApplicationsAccessing genomic databases on the InternetGenomics regulationGenomics governance Mixed Non-Rival Local/national/ YesEducation of professionals regional/globalEducation of general publicEnvironmental improvement (e.g. bioremedation w/ GMO)Genomics to avoid bioterrorism (e.g. biosensors)
Health Economics – SOCE3B11 – Autumn 04/05
Key issues
Intellectual property rights and patent legislation Non-exclusion = lack of commercial incentive Patents grant artificial exclusion, but create
‘club good’ - socially sub-optimal production/consumption of genomics
Turning knowledge in to practice: the importance of ‘access goods’ Capacity strengthening - R&D, ethical, legal,
social and policy Knowledge is tacit
International bodies to organise, advocate and regulate input of national governments & other players
Health Economics – SOCE3B11 – Autumn 04/05
GPGs and collective action
At international level there is no counterpart world government
Core policy issue is therefore one of ensuring international collective action to facilitate the production of, and access to, goods which are largely non-excludable and non-rival in consumption, and yield significant external benefits, across multiple nations
Health Economics – SOCE3B11 – Autumn 04/05
Global public goods: theory versus practice
GPG theoretically non-excludable, but in practice may be barriers to access. E.g. technological/financial restrictions to accessing information on the Internet
Some countries may not be able to collaborate on global initiatives, such as surveillance, adhering to international standard treatment protocols etc
Strengthening of health care and infra-structure systems may therefore become a GPGH
Health Economics – SOCE3B11 – Autumn 04/05
Role of international bodies
Initial international decision to produce the GPGH
Enactment of (inter-) national legislation and the creation of mechanisms required to provide the GPGH
Enforcement of legislation, operation of supply mechanisms and compliance with international decision
Health Economics – SOCE3B11 – Autumn 04/05
Role of international bodies
Large number of actors: Government (developed and developing countries) Companies (national and transnational); Non-government organisations (national and
international campaign groups, interest groups etc) People (voters, workers, health service users, etc)
So, who, globally, defines political agenda and priorities for resource allocation? Who enforces?
Lessons from climatic change: reducing CFC’s resolved due to high ben:cost ratio
for most countries regardless of what others did reducing carbon emissions lower ben:cost ratio and
dependent on actions of other countries
Health Economics – SOCE3B11 – Autumn 04/05
Financing GPGH: who pays?
International agencies? National governments? Transnational corporations?
Developed country governments are the major prospective source of financing for GPGs, directly or through international institutions Major concern that this may divert ODA BUT GPG concept predicated on self-interest -
implies support is investment in domestic health
Health Economics – SOCE3B11 – Autumn 04/05
Financing GPGH: how?
Mechanisms Voluntary contributions Ear-marked national taxes coordinated
between countries Taxes imposed and collected at global level Market-based mechanisms
BUT: those who lose from provision of GPGs have incentive for noncomplicance, so require: Formal coercion - limited on global level Informal coercion - unstable and unreliable Compensation - essential with or without
coercion
Health Economics – SOCE3B11 – Autumn 04/05
GPGH conclusions
Recognition of the interdependency of nations (and populations & generations) and the need for collective action
New rationale for funding (additional to ODA) from developed countries
Emphasises the importance of international bodies and international action in creation of mechanisms and institutions required
Health Economics – SOCE3B11 – Autumn 04/05
Further references
Smith RD, Beaglehole R, Woodward D, Drager N (2003). Global public goods for health: a health economic and public health perspective, Oxford University Press, Oxford.
Smith RD, Woodward D, Acharya A, Beaglehole R, Drager N. Communicable disease control: a ‘global public good’ perspective. Health Policy and Planning, 2004; 19(5): 272-279.
Smith RD, Thorsteinsdóttir H, Daar A, Gold R, Singer P. Genomics knowledge and equity: a global public good’s perspective of the patent system. Bulletin of the World Health Organization, 2004; 82(5): 385-389.
Smith RD. Global public goods and health. Bulletin of the World Health Organization, 2003; 81(7): 475 (editorial).
Thorsteinsdóttir H, Daar A, Smith RD, Singer P. Genomics - a global public good? The Lancet, 2003; 361: 891-892.