Externalities in vaccination
As you may or may not know, I'm studying economics with the Open University in my spare time. It's a fascinating subject, and I'm enjoying it very much. The latest thing I've been reading about as part of the course is why free market mechanisms generally fail in healthcare, and one of the reasons is an interesting little economic feature of vaccinations that's never occurred to me before. So in case it hadn't occurred to you either, I thought I'd share it with you.
In theory, competitive free markets can solve pretty much all our problems. Some politicians believe that to be true in practice. The former British Prime Minister Margaret Thatcher seemed to believe that. It's almost as if she'd started studying economics, read chapter 1 of a textbook that explained why competitive free markets were wonderful, and then never bothered to read chapter 2 that explains why competitive free markets often don't exist.
Free markets, or at least something that closely approximates them, do exist of course: if I want to buy a tin of baked beans, I can do so incredibly cheaply because there are many retailers who compete for my business. But it is a great mistake to think that this simple principle applies universally. Many markets fail, because the assumptions behind the competitive free market model are quite restrictive and often don't apply in practice.
There are many reasons why a free market in healthcare would fail. But the one that intrigued me was some of the positive externalities that exist, particularly for vaccination.
An externality is a term that economists use to describe a societal benefit or harm that's associated with the purchase of a commodity, but is not reflected in the price. One of the best known examples of a negative externality (ie a harm) is pollution. If I buy petrol to put in my car, I am increasing pollution and CO2 emissions, but I'm not paying for it. The high taxes we pay on petrol are an attempt to get round that problem by internalising the externality. You could argue about whether petrol taxes are too high, too low, or about right to make up for the externality, but in any case I hope the principle is clear.
If we want free markets to solve our problems for us, then one of the essential conditions is that there should be no externalities in the markets.
So let's consider vaccination.
If I choose to vaccinate myself against some nasty disease, then clearly there is a benefit to myself. In a free market, I would be prepared to pay an amount commensurate with that benefit. If the vaccination were expensive and the benefit were minimal (for example, protecting against a disease that I was at very low risk of catching anyway), then I probably wouldn't choose to be vaccinated.
But there are positive externalities to vaccination. If I get vaccinated against a nasty disease, then not only am I protecting myself, I am also less likely to pass the disease on to others. So there is societal benefit to my being vaccinated over and above the benefit to me personally, in other words a positive externality. We can imagine that there is an optimal level of vaccination for the population at large, based on the costs and benefits of vaccination. Those benefits are made up of benefits for the individuals who are vaccinated plus the benefits for everyone else (the externality). A free market, however, would result in a lower level of vaccination than that, because rational self-interested people would be unwilling to pay for the benefits to others.
That externality therefore means that the assumptions that a free market will sort everything out for the best are broken. In this case, it makes sense for government to subsidise the cost of vaccination, in much the same way as it makes sense for them to put taxes on petrol.
Similar considerations apply to treatment of infectious diseases, of course, not just to prevention.
That's just one of the reasons why healthcare is not something that's best left to the free market to sort out. There are many others. It's just a shame that the government's recent reforms to the NHS seem to be based very much on the idea that free markets will make everything better.