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University of South Carolina Arnold School of Public Health Dept. of Health Services Policy and Management HSPM J712

External Costs and Benefits

External costs and benefits play an important role in public health. It would not be a stretch to say that external costs and benefits are why we have "public health." 

Someday, this will be a tutorial that use Q&A to go over several related concepts:

For now, let me just define the concepts.

An external cost is a cost that a producer or a consumer imposes on another producer or consumer, outside of any market transaction between them. "External" means "outside." Here, "outside" means outside of any buying and selling among people or firms. If there is an external cost on you, you are giving something up without receiving any agreed-upon payment.

Pollution of air or water is the prime example of an external cost.  If you drive a car, you are putting the products of combustion into the atmosphere.  These added gases can make the air poisonous for other people to breath.  They contribute to climate change.  Those are external costs of driving cars.  Coal- and oil-fired power plants impose similar external costs on all of us.

An external benefit is a benefit that someone gains because of someone else's action, outside of any market transaction between them.  Immunizations give external benefits.  When you get a vaccine for a certain disease, you make it less likely that you will contract the disease.  That is the internal benefit.  What you also do is make is less likely that other people will get the disease, because they probably will not catch it from you.  That is the external benefit. 

The external benefit from immunizations is important.  Most vaccines are not 100% effective.  That is, they do not reduce to zero the probability of getting the disease if your are exposed to it. Even so, if a high percentage of a population gets the vaccine, outbreaks won't spread, because people who have the disease probably will not contact a vulnerable person.

Behind the notion of external cost is a notion of property rights.  You could regard air pollution as stealing somebody else's air.  How is that different from stealing somebody else's car?  The difference is that you can have a legally enforceable property right to a car.  You can "own" a car.  "Own" means that if someone takes it without your permission, you can ask the police to apprehend that person who took it and give you back your car. If the thieft damages your car, a court can make the thief pay you compensation. Your property right to the air you're breathing is not so easily enforced. That is why we need laws that limit pollution, to make your right enforceable.

A public good is a good such that, if you provide it for some people, you might as well provide it for everybody.  National defense is the classic public good.  The armed force that needed to protect you, individually, from a foreign invasion is not much smaller than the armed force needed to protect the nation from invasion.  Roads, water, and sewers are public goods (unless you're living alone out in the country). If you, individually, stop driving or using your water or your sewer connection, that doesn't make it any less costly to provide your neighbors with roads, water, or sewer service.

What are some health care or public health activities that are public goods? Are hospital emergency rooms and trauma centers public goods?

A free rider is a person who gains an external benefit, or a benefit from a public good, without paying for it.  Suppose you said that you did not want to pay Federal income tax anymore, and that, in return, you do not want the country's armed forces to protect you in the event of a foreign attack.  You're trying to be a free rider, because the armed forces protect you just like they protect your neighbors.  You would probably be prosecuted.  The law frowns on that kind of free riding.  A person to decides not to get an immunization is also a free rider.  That person benefits from the immunizations that other people get, because their actions reduce the person's likelihood of contacting someone with the disease.  It is tempting to be a free rider, because you save the cost and the risk of being immunized, but if too many people become free riders, the disease returns in the population.  That is the justification for laws that require school children to have a full set of immunizations.  In the first half of 2008, we saw the consequence of too many free riders for measles inoculations.