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.
A really interesting, easy to read article about economics - a rarely managed feat!
This argument seems relatively shallow in that it only mentions externalities whilst ignoring other potential benefits of introducing free markets into vaccination. It is as if your argument ignores that free markets necessarily alter the conditions under with development occurs.
Yes, it could result in fewer people choosing to take up vaccines and therefore putting the population at higher risk of contracting dangerous diseases. But your argument ignores the fact that free markets can result in greater levels of investment and innovation, which could potentially lead to new and more potent treatments that could vaccinate against a large number of diseases in one go. And on top of that, increased competition could lead to a downward pressure on prices. Imagine if such a set of circumstances allowed the development of a cheap set of vaccinations that could cover all major diseases that could be administered to all children at birth for only a few pounds. This would negate all potential negative externalities as described above.
I should say that I agree with your conclusion - just not the means of getting to that conclusion.
Thanks for your comments, Tom.
I will totally put my hands up to your charge of a shallow argument. It's a hugely complex subject, and I was talking about only one small aspect. There are many other arguments both for and against opening up markets in healthcare.
Your arguments make sense, but don't they apply just as well to the situation we've had until now, namely government funded supply of healthcare to individual patients, but a free market of private providers of vaccines?
Whether there's anything further to be gained by opening up a completely free market is something I have my doubts about. But you could argue it either way from a theoretical perspective: the only way to know the real answer is to do the experiment and see what happens. And even then, we probably won't really know, given that the best experiment we can hope for is a before-and-after design. I can't see a randomised trial ever being feasible.
tom, what are the potential benefits of introducing free markets into vaccination?
first, i know of no european country were the prices of reimbursed drugs are not regulated by the government. so, no free play of market forces here, anyway. luckily, one might add.
depending on the country, certain vaccines are reimbursed, others are subsidized, and yet others are neither reimbursed nor subsidized. neither reimbursement nor subsidies lower the vaccine manufacturers’ income; so, they are free to continue to invest and innovate.
governments reimburse—or subsidize—vaccinations to motivate people to get vaccinated, thereby, as adam pointed out, protecting not only themselves (and sparing the healthcare system the costs of treatment in case of an infection) but also society at large (bringing even more substantial savings to the healthcare system—or at least preventing permantent disabilities and fatalities).
governments stopping to subsidize vaccinations will probably find that vaccination uptake will decrease as a result. psychologically, no longer subsidising a particular vaccine signals to the public that this vaccination is not important.
this mix of economic and psychological considerations is further complicated by yet another phenomenon, namely that more and more people stop getting vaccinated anyway because they think many diseases are not longer around. yet, stop vaccinating, and many a vaccine-preventable disease will recur. smallpox has come to be eradicated thanks to vaccination; measles and polio may follow suit—but at a slower than expected pace because of slackening vaccination morale. “who cares about those who die or are left with permanent sequelae, as long as it’s not me.” in economic terms, what’s the worth of one child’s life?
as for increased competition leading to a downward pressure on vaccine prices—there are a number of competitors out there, but looking at how sophisticated their manufacturing processes and facilities are, i doubt that a “cheap set of vaccines” that everyone can afford will be available anytime soon.
so, plenty of ‘externalities’ when it comes to healthcare. i understand adam’s neat assay to highlight that the more ‘externalities’, the less likely free markets will do the trick. my wild guess is that if the healthcare market were totally free and unregulated, only few of us would be able to afford any medical care at all. it’s a seller’s market—another basic principle of economics.