Lecture 20: Public Goods & Health

1. Lecture 20: Public Goods & Health Richard Smith Reader in Health Economics School of Medicine, Health Policy & Practice

2. Overview of lecture • What is a ‘public good’? • Is ‘health’ a public good? • Importance of public goods for health • ‘Global’ public goods and health

3. 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!)

4. 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)

5. Is health a public good? • Health per se is NOT a public good: • one person’s 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)

6. 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)

7. Club goods Public goods Rivalry High Low Private goods Common pool goods High Low Excludability Public-private spectrum

8. 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

9. 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

10. 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 = ‘prisoner’s dilemma’

11. 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)

12. Private individual demand curve

13. Private market demand curve

14. Public quasi-demand curve

15. Aggregate value of public good

16. 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 > benefit for any one consumer and non-rivalry thus means no production

17. Why no private production

18. Inefficiencies in private supply

19. 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

20. 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)

21. 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 benefit>cost • ‘Privatizing’ (excluding) a public good through establishing property rights - patent system • Direct finance, funded through general taxation • Other financial incentives/compensation - permits

22. 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

23. Club goods Public goods Rivalry High Low Private goods Common pool goods Local National Regional High Low Global Excludability Global public goods

24. 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

25. Is health a ‘global’ public good? • Health is NOT a global public good: • one nation’s 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

26. 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 person’s protection will not reduce another’s • Non-excludable - no limit to safety that eradication will offer - geographically or demographically

27. Poliomyelitis distribution 1988/2001 1988 >125 countries 2001 10 countries

28. 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

29. Donors to GPEI 1985-2001 (~$2bn) WHO Regular Budget UNICEF Belgium Australia 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

30. What may be GPG for health? • Knowledge (and technologies) • Policy and regulatory regimes • Health systems (as key access goods)

31. Example: Genomics (knowledge) • Genomics – study of organism’s entire genetic material (30-40,000 genes in humans) • Human Genome Project: • involves research teams in 20 different countries • >$3bn 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

32. GPG aspects of genomics

33. 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 - R&D, ethical, legal, social and policy • Knowledge is tacit • International bodies to organise, advocate and regulate input of national governments & other players

34. 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

35. 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

36. 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

37. 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 CFC’s resolved due to high ben:cost ratio for most countries regardless of what others did • reducing carbon emissions lower ben:cost ratio and dependent on actions of other countries

38. 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

39. 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

40. 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

41. 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 good’s 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.