1、Health is contagiousUnlike other factors that affect economic wellbeing(e.g.height or appearance)your health is determined by the health of those around you Ex:Hope your friends got their flu shots!Many economic externalities in healthBoth positive and negative ones Externalities can justify governm
2、ent interventionWithout externalities,economic theory says that markets reach an efficient outcomeTaxes&subsidies only distort the efficient outcomeWith externalities,government responses may help the market reach a socially desirable state Ex:Public health efforts,like flu vaccination campaigns or
3、quarantines to combat deadly diseases like Ebola virusExternalities in healthExternality:any positive or negative effect that a market transaction imposes on a third party(i.e.someone other than the buyer or seller).Many externalities in the world of health:second-hand smokecatching infectious disea
4、se from your neighborsthe motivational benefits of living among active peoplethe taxes paid to the government to care for sick people Private welfare vs.social welfareImportant distinction between private and social welfarePrivate welfare is the utility level isolated to one individual within a soci
5、ety Actions that increase or decrease this quantity are said to have private benefits or private costs.Social welfare is the summed utility levels of all individuals within a society Actions that increase or decrease this quantity are said to have social benefits or social costs.Herd immunityEach va
6、ccination protects not only the vaccine-recipient but also neighbors as wellEven unvaccinated people benefit when their neighbors,friends,coworkers,and family become immune through vaccinationKnown as herd immunityHerd immunity is a classic positive externality:the social gain from each vaccination
7、is greater than the private gain from that vaccination.Herd immunityWhen deciding whether to get vaccinated,people balance the private gains from vaccination immunity from the disease against the private costs But a person considering vaccination ignores the social benefits of herd immunity Since so
8、cial benefits private benefits,a private market produces fewer vaccinations than socially optimal The market for flu vaccinationsPrivate demand curve D reflects the private decisions of people in the market about whether they want to vaccinate at price P These decisions reflect only private costs an
9、d benefits and not social costs and benefitsHerd immunity benefits are ignored The market for flu vaccinationsSocial demand curve Dsoc is greater than the private demand curve Dpriv Captures positive externality of herd immunitySocially efficient equilibrium higher than private equilibrium The marke
10、t for flu vaccinationsNote:Size of the social loss(the area of B)depends on the price elasticity of the demand curve.Antibiotic resistanceWidespread use of penicillin responsible for increases in antibiotic resistance Every dose of antibiotics breeds more resistant bacteriaUse of antibiotic drugs im
11、poses a negative externalityDespite this negative externality,the use of some antibiotic drugs may still be socially efficientBut in some cases,the social costs of antibiotic use can outweigh benefits The market for antibioticsThe social supply curve is higher than the private supply curve because e
12、ach dose of antibiotics is more costly to society than its marginal cost of production.Patients make purchase decisions based on the private price P*priv but society as a whole pays the greater price P*soc whenever an antibiotic is purchased.The difference between the two price levels P*soc -P*priv
13、is equal to the additional cost of antibiotic resistance.The market for antibioticsThe market for antibioticsPigouvian taxes&subsidiesPigouvian subsidies and taxesIf externalities cause social harm,how might government policy restore the social optimum?Pigouvian subsidy or tax:a subsidy or tax desig
14、ned to“internalize”an externality by altering private costs and benefits Pigouvian subsidies encourage more consumption of goods with positive externalitiesPigouvian taxes reduce consumption of goods with negative externalitiesPigouvian subsidies and herd immunityPigouvian subsidies and herd immunit
15、yTotal subsidy equals the per-transaction subsidy multiplied by the number of vaccinesAlthough these subsidies flow directly to consumers,they are not totally costless.Government must raise money for a subsidy through tax revenue,and taxes may be distortionary One way to avoid this is by funding Pig
16、ouvian subsidies with Pigouvian taxes Total subsidy=Q*soc x X=Q*soc(ps-pc)Pigouvian taxes and antibioticsIn the market for antibiotics,the social cost of each dose includes not only the private cost of manufacturing it but also its role in breeding antibiotic resistance.The private drug manufacturer
17、 considers only the costs of production,so the private supply curve understates the social cost.More drugs than socially optimal are purchased,and a social loss results.A per-dose tax on the supplier can align the private and social supply curves.Pigouvian taxes and antibioticsThe Coase theoremThe C
18、oase theoremThe Coase theorem:resources will be used efficiently to maximize social welfare,even in the face of externalities,given conditions:property rights are well-defined,transaction costs or bargaining costs are sufficiently low If assumptions satisfied,the socially optimal will be reached by
19、the parties bargaining with each otherregardless of how property rights are initially assignedWilly Wonka and Matilda Wormwood Willy Wonka and Matilda Wormwood have neighboring businessesWormwood takes Wonka to court because the employees working on his property are so noisy that they disrupt her bu
20、siness operations.No matter who wins the case,a negative externality will be created for the opposing partyIf Wonka wins,Wormwood must shut down her business due to the noiseif Wormwood wins,Wonka must shut down his noisy business.Willy Wonka and Matilda Wormwood Suppose that Wonka will lose$1,000 a
21、nnually if he has to close his business,but that Wormwood will lose$2,000 annually if she has to shut down her business.Assuming these outcomes are mutually exclusive,we should hope that Wormwoods office stays open in order to maximize social welfare.Willy Wonka and Matilda Wormwood But imagine that
22、 the judge decides in favor of WonkaWormwood can then offer to pay$1,500 a year to Wonka to cease the noise.This trade is Pareto-improving,because both parties are made better off:Wonka makes more money than he would if his business were still operating,and Wormwood can keep her business open,even t
23、hough the judge ruled against her property rights.Transaction costsHigh transaction costs are often the biggest hurdle to achieving a Coasian bargain Distrust,poor enforceability,legal fees,finding a place to meet can all be high transaction costsWith high transaction costs,initial property rights a
24、ssignment matters!When transaction costs are high,difficult to bargain away from the initial allocation With high transaction costs,governments should consider which property right systems are most conducive to bargaining and negotiation Ex:In most countries,a patient has a property right to take an
25、tibiotics as long as she secures a prescription from a doctor.Ideally,the doctor serves as a proxy for the interests of the rest of the population and only agrees to the prescription if the benefit to the patient outweighs the social harm from antibiotic resistance.Even if doctors do not always serv
26、e as perfect proxies,this property rights assignment avoids both the“hold-up”and coordination problems of alternate property rights assignments.Transaction costsThe economics of organ donationsOrgan donationsOrgans available for transplant are exceedingly scarce.The presence of a transplant waitlist
27、 imposes a large cost on dying patients and suggests that the market is not doing a good job of supplying organs.Another oddity of the market for organs is that even the richest people in the world cannot get an organ when they need one.Is the apparent dysfunction of the market for organs creating a
28、 social loss,or is the waiting list a socially efficient outcome?Repugnant transactions and negative externalitiesSome argue organ sales are immoral and degrading for the society that permits them Further,the allocation of the organs may violate notions of equity.Both the collection and distribution
29、 of organs may cause people to feel that the unfettered sale of organs is repugnant.This repugnance is a sort of negative externality,that may cause a social loss.People not party to the organ sale suffer knowing that somewhere this kind of organ auction is happening.Coasian approach:Transferable or
30、gan property rights As long as the Coase theorem holds,markets can work out any externality even an externality like organ sale repugnance on their own.Example Suppose the government grants people a transferable property right to their own organs.In this world,people would be free to buy and sell or
31、gans,even though some people may be repulsed by this practice.But if bargaining costs are low,there is a ready solution:those who are repulsed can pay people not to transact in organs.Coasian approach:Transferable organ property rights However,the assumption that organ property rights can be well-de
32、fined may not be right.Example:Ultimately,the Coase theorem fails to apply in either the U.S.or Spain,because property rights are not well-defined.In both cases,no one can sell property right to organs,so parties only have a limited property right over organs.Because property rights are difficult to
33、 define and enforce in the case of organs,and because bargaining costs seem prohibitively high,a Coasian approach may not succeed in achieving a socially optimal level of organ transactions.Pigouvian approach:An infinite tax Pigouvian strategy is to apply a tax that reflects the amount of externalit
34、y that each repugnant transaction does to fellow citizens If repugnance is relatively low,this tax might be small and deter very few transactions.If the repugnance is great,optimal Pigouvian tax might be high enough to discourage most organ sales If the repugnance is extreme,optimal Pigouvian tax sh
35、ould be so high that no one want to sell any organs at all Economically equivalent to a ban on organ sales!Pigouvian approach:An infinite tax In real-world organ markets,this is the preferred policy adopted by nearly every government on Earth:outright ban on any organ sales.The ban on monetary organ
36、 transactions accounts for most of the idiosyncrasies of this market,especially the long waiting times for organs.One way governments have tried to shorten waiting lists is through subsidies that provide financial incentives for people to become organ donors.But such subsidies have also been known t
37、o backfire.ConclusionWhen externalities create social loss,a government action such as a Pigouvian tax or a Coasian property right assignment can improve social welfare.But it is not clear that all externalities justify government response Is every externality valid?Or are there externalities so extraneous or frivolous that they should be discounted in the social welfare function?These questions are not just philosophical exercises,though as we saw in the case of organs,the decision to treat organ sale repugnance as a valid externality has a profound impact on the shape of that market.
