Back to The Dismal Science

Public health and market failures

By Eric Crampton • 13/10/2014


I’m not particularly worried about any large-scale Ebola outbreaks in the developed world. It’s easier in the developed world to run effective quarantine and to track down those who might have been exposed to an infected and contagious person.

That certainly doesn’t mean Ebola isn’t worth worrying about. The burden of Ebola in Africa looks likely to be huge. Even where the total number of deaths remains very low relative to other African diseases like malaria, Ebola has an incomparable potential to disrupt economic activity. I’d put even odds that economic disruption caused by completely understandable fear around Ebola will kill as many people as the disease itself. When taxicabs become ways of catching disease and hospitals terrifying, and when a worker with flu symptoms could well be somebody who’ll kill all your staff if he comes in to work and touches people – it’s really not good.

Pandemic protection is a strong public good. Any dollar’s investment in pandemic protection protects everybody who could be at risk: it’s non-rivalrous. Every dollar spend improving hospitals in Africa, training doctors, providing medical equipment, and developing emergency response protocols is a dollar that protects each and every person in Africa, and by extension the rest of the world where there’s risk of pandemics’ spreading (think Bangladesh, Pakistan and India, not Europe and America). We all benefit from it. There is then a strong case for government funding of pandemic prevention efforts. There’s also a really good case for things like Kickstarter, or PledgeMe, running campaigns on it to also help out.

The World Health Organisation is the outfit that’s supposed to have an eye on the ball on this stuff. Unfortunately, in my view, the WHO has gone astray. Or at astray from what it should have been.

In the public health world, the social welfare function is either minimising the number of deaths, minimising incidence of morbidity, or maximising the number of disability-adjusted life-years or quality-adjusted life years. In economics, it’s maximising some weighted utility function. The two yield very different outcomes and are what drive my dissatisfaction with the WHO’s prioritisation.

Suppose we have several kinds of initiatives that would increase DALYs and reduce the overall burden of sickness and disease. Some of these, like polio eradication, provide health benefits without any particularly large cost as viewed by the person receiving the polio vaccine.* Nobody enjoys having polio. Nobody would voluntarily seek to have polio. If polio ceased to exist, the world would be a better place. Others of these, like regulations on soda, tobacco, alcohol, fatty foods, and salt, can increase DALYs and reduce the overall burden of sickness and disease too, but they come at a cost in terms of private experienced consumption benefits: many people like soda, smoking, drinking, and eating tasty things.

In the public health world, if a dollar’s worth of effort yields greater expected DALY benefits in dietary and lifestyle regulation than it does in pandemic avoidance, that dollar should go to dietary and lifestyle regulation. In the economics world, we start by looking for market failures and target funding where markets won’t do well on their own. And when it comes to lifestyle regulation, we need a rather harder look at things than just DALYs where choosing agents might well prefer to consume unhealthy things, at DALY cost, in exchange for current consumption benefits.

If we had to rank-order things by a very rough guess as to where the market failures are worst, I’d rank them as follows:

  1. Pandemic readiness and response, especially in developing countries;
  2. Antibiotic resistance and superbug mutation;
  3. Development of new antibiotics;
  4. Contagious diseases affecting developing countries where there’s no particular profit in pharmaceutical investment: malaria and a big pile of others;
  5. Other contagious disease investigation and response;
  6. Vaccination promotion;
  7. Poor information about risks of smoking, diet and alcohol in the third world
The first one is at the top of my list not on expected value terms but as insurance. Like global warming, bad pandemic outcomes have the potential – low probability but potential – to destroy civilisation. It’s then worth making investments in those kinds of areas not just on expected value calculations but also on an insurance argument – like Weitzman’s argument on global warming. I also think governments should be investing more in asteroid detection and response, on exactly the same kind of argument.  
Pandemic readiness provides a strong nonrivalrous benefit to everyone. Third world countries generally do not have anyone with a sufficient encompassing interest in their prevention to ensure that the job gets done, so other mechanisms are needed, whether multigovernmental investment through the WHO or philanthropic investment by individuals. Note that there are exceptions, when you have enough Foreign Direct Investment. 
Antibiotic resistance flows directly from the negative externality imposed when someone over-uses antibiotics or uses them improperly. Development of new antibiotics has little profit potential where they’re sensibly restricted to very hard cases and where governments and insurers would refuse to pay the per-dose amount that would then be needed to cover development costs. Similarly, there is little expected profit in developing cures for diseases that mostly affect very poor people and where patent protection is unlikely to be enforced. In all of these cases, prizes seem the most obvious solution for new drug development, where the funds would be provided both by governments and by philanthropists. 
Other contagious diseases and vaccination are lower on the list. Every one of us has an interest in protecting our own health. But because others bear direct contagion costs of our personal underinvestment in efforts against contagious disease, we will have less vaccination than would be optimal and less control against contagious disease. Subsidising the development and deployment of vaccines is then worthwhile. I can even see reasonable arguments for making vaccination mandatory.
Down at the bottom of the list is information-provision on lifestyle issues. There are plausible market failures around people being poorly informed about the health and addiction risks of tobacco and alcohol, and about the health risks of unbalanced diets. But a lot of observed behaviour would simply drop out of expected low life expectancies in developing countries and lower incomes, both of which increase the expected willingness to bear risk in exchange either for income or for pleasure. People doing unhealthy things isn’t itself necessarily evidence of irrationality, or bad information. 
So that’s how at least this economist would rank things. But if we ranked them by “where does a $1 do the most to improve DALYs”, we could get an entirely different outcome. It would be like an electrical engineer ranking metals by conductivity and then proposing that we use silver for our main electrical transmission lines. Sure, it’s more conductive, but it also costs more. Conductivity isn’t the best outcome measure. Neither are DALYs where some of the potential policies impose costs on consumers that are not measured or weighted or considered by the public health side. 
In the public health world, tobacco is one of the very most important things to be worried about because it ranks very highly in the DALY-reduction rankings. Tobacco is not contagious, does not have existential risk to civilisation, and in some but not all cases results from informed decisions to enjoy nicotine at the expense of health and life-expectancy. The external costs imposed by a smoker are very low relative to the external costs imposed by somebody with contagious disease. Similarly, eating a diet with too much salt mainly hurts the person choosing to eat the diet with too much salt. There could be some case for providing information to remedy any market failure based on people not knowing the full health costs of eating too much salt, but that’s about it. 
There are very real and substantial market failures in public health that are underweighted where public health advocates take a DALY-based approach rather than starting with market failures. If we look at priorities by budgetary allocations, it’s great to see the focus on polio eradication, and the other work on tuberculosis, malaria, and AIDS; the first two have strong market failure arguments justifying them. AIDS receives a lot of private funding in the developed world, but there are reasonable arguments for providing funding there in the developing world. But increasing funding allocations to lifestyle issues and to tobacco control? It’s harder to find a market failure case there.
I’m not building a straw-man here. They take “minimise burden of disease” as objective function, where every potential health cost matters equally, with no weighing of offsetting consumption benefits that come from alcohol or salty foods as compared to Ebola.
It worries me that journalists cannot find an after-hours WHO spokesperson on Ebola when a Spanish nurse contracts it in a Spanish hospital, that WHO officials cite being overstretched as reason for their not being able to respond as effectively to a pandemic, and that the WHO is at the very same time putting resources into e-cigarette regulation. There are opportunity costs to spending $122 million on the line item including alcohol, tobacco, drugs, and unhealthy diets.

This isn’t just a “get off my lawn and leave me alone” thing. It’s “why are you spending a hundred million bucks protecting people against themselves when you’re under-resourced for pandemics?!?” thing.

Shouldn’t we first target the health priorities that stem from market failures and impose existential risk?

Update: I’ve had request for clarification of what market failure means. My encyclopaedia entry is here. Further discussion here.

* Or at least there wouldn’t be costs to getting the polio vaccine if the CIA hadn’t managed to convince everybody that vaccinations are spy mission.

.