Lecture 20: Public Goods

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Lecture 20 Public Goods Health
Richard Smith Reader in Health Economics School
of Medicine, Health Policy Practice
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Overview of lecture

• What is a public good?
• Is health a public good?
• Importance of public goods for health
• Global public goods and health

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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!)

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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)

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Is health a public good?

• Health per se is NOT a public good
• one persons 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)

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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)

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Public-private spectrum
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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

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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

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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 prisoners dilemma

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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)

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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 gt benefit for any one
  consumer and non-rivalry thus means no production

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Why no private production
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Inefficiencies in private supply
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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

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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)

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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 benefitgtcost
• Privatizing (excluding) a public good through
  establishing property rights - patent system
• Direct finance, funded through general taxation
• Other financial incentives/compensation - permits

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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

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Global public goods
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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

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Is health a global public good?

• Health is NOT a global public good
• one nations 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

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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 persons protection will not
  reduce anothers
• Non-excludable - no limit to safety that
  eradication will offer - geographically or
  demographically

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Poliomyelitis distribution 1988/2001
1988
gt125 countries
2001
10 countries
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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

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Donors to GPEI 1985-2001 (2bn)
WHO Regular Budget
Belgium
Australia
UNICEF
Aventis Pasteur/IFPMA
Canada
Other
European Union
Netherlands
US CDC
Germany
UN Foundation
Denmark
USAID
Bill Melinda Gates Foundation
World Bank IDA Credit to Govt of India
Japan
Rotary International
United Kingdom
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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 organisms entire genetic
  material (30-40,000 genes in humans)
• Human Genome Project
• involves research teams in 20 different countries
• gt3bn 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

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GPG aspects of genomics
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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 - RD, ethical, legal,
  social and policy
• Knowledge is tacit
• International bodies to organise, advocate and
  regulate input of national governments other
  players

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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

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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

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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

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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 CFCs resolved due to high bencost
  ratio for most countries regardless of what
  others did
• reducing carbon emissions lower bencost ratio
  and dependent on actions of other countries

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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

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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

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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

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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 goods 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.