Health Economics – SOCE3B11 – Autumn 04/05 Lecture 20: Public Goods & Health Richard Smith Reader in Health Economics School of Medicine, Health Policy.

Health Economics – SOCE3B11 – Autumn 04/05

Lecture 20: Public Goods & Health

Richard SmithReader in Health Economics

School of Medicine, Health Policy & Practice


Overview of lecture

What is a ‘public good’? Is ‘health’ a public good? Importance of public goods for

health ‘Global’ public goods and health


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!)


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)


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)


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)


Public-private spectrum

Clubgoods

Publicgoods

Privategoods

Commonpool goods

Excludability

High Low

Hig

h

Low

Riv

alry


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


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


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’


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)


Private individual demand curve


Private market demand curve


Public quasi-demand curve


Aggregate value of public good


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


Why no private production


Inefficiencies in private supply


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


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)


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


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


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


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


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


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


Poliomyelitis distribution 1988/2001

1988>125 countries

200110 countries


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


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


What may be GPG for health?

Knowledge (and technologies)

Policy and regulatory regimes

Health systems (as key access goods)


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


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)


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


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


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


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


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


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


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


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


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.

Health Economics – SOCE3B11 – Autumn 04/05 Lecture 20: Public Goods & Health Richard Smith Reader in Health Economics School of Medicine, Health Policy.

Documents

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