Lecture 20: Public Goods & Health
Richard Smith
Reader in Health Economics
School of Medicine, Health Policy & Practice
Health Economics – SOCE3B11 – Autumn 04/05
Overview of lecture
What is a ‘public good’?
 Is ‘health’ a public good?
 Importance of public goods for health
 ‘Global’ public goods and health

Health Economics – SOCE3B11 – Autumn 04/05
Public goods

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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!)
Health Economics – SOCE3B11 – Autumn 04/05
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)
Health Economics – SOCE3B11 – Autumn 04/05
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)
Health Economics – SOCE3B11 – Autumn 04/05
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)
Health Economics – SOCE3B11 – Autumn 04/05
Rivalry
Public-private spectrum
Club
goods
Public
goods
Private
goods
Common
pool goods
High
Low
Excludability
Health Economics – SOCE3B11 – Autumn 04/05
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

Health Economics – SOCE3B11 – Autumn 04/05
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
Health Economics – SOCE3B11 – Autumn 04/05
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’

Health Economics – SOCE3B11 – Autumn 04/05
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)
Health Economics – SOCE3B11 – Autumn 04/05
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 >
benefit for any one consumer and nonrivalry thus means no production

Health Economics – SOCE3B11 – Autumn 04/05
Why no private production
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Inefficiencies in private supply
Health Economics – SOCE3B11 – Autumn 04/05
Example PGH: medical research

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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
Health Economics – SOCE3B11 – Autumn 04/05
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)

Health Economics – SOCE3B11 – Autumn 04/05
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
Health Economics – SOCE3B11 – Autumn 04/05
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
Health Economics – SOCE3B11 – Autumn 04/05
Rivalry
Global public goods
Club
goods
Private
goods
High
Public
goods
Common
pool goods
Low
Excludability
Health Economics – SOCE3B11 – Autumn 04/05
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
Health Economics – SOCE3B11 – Autumn 04/05
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
Health Economics – SOCE3B11 – Autumn 04/05
Global ‘Polio Eradication Initiative’



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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
Health Economics – SOCE3B11 – Autumn 04/05
Poliomyelitis distribution 1988/2001
1988
>125 countries
2001
10 countries
Health Economics – SOCE3B11 – Autumn 04/05
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 & privatepublic partnership
 A number of ‘free riders’ remain

Health Economics – SOCE3B11 – Autumn 04/05
Donors to GPEI 1985-2001 (~$2bn)
WHO Regular Budget
UNICEF
Canada
European Union
Netherlands
Germany
UN Foundation
Denmark
Bill & Melinda Gates
Foundation
Japan
Belgium
Australia
Aventis Pasteur/IFPMA
Other
US CDC
USAID
World Bank IDA Credit
to Govt of India
Rotary International
United Kingdom
Health Economics – SOCE3B11 – Autumn 04/05
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 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:




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Clinical diagnostics and predictive testing
Identifying new treatment
Developing preventive measures
Direct economic benefits
Genomics is principally about knowledge – public good
Health Economics – SOCE3B11 – Autumn 04/05
GPG aspects of genomics
Applications
1. Individual Applications
Diagnosis of diseases (e.g. PCR for Dengue)
Predictive tests (e.g BRAC for breast cancer)
Vaccines
Pharmacogenomics adapted to the individual
2. Population Applications
Screening tests (e.g. for sickle cell disease)
Mass immunisation
Pharmacogenomics adapted to the population
3. Other Applications
Accessing genomic databases on the Internet
Genomics regulation
Genomics governance
Education of professionals
Education of general public
Environmental improvement (e.g. bioremedation w/ GMO)
Genomics to avoid bioterrorism (e.g. biosensors)
Excludable or
non-excludable
Rival or
non-rival in
consumption
Level of
application
GPGH
Potential
Excludable
Rival
Local
No
Mixed
Mixed
Local/national/
regional/global
Yes
Mixed
Non-Rival
Health Economics – SOCE3B11 – Autumn 04/05
Local/national/
regional/global
Yes
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
Health Economics – SOCE3B11 – Autumn 04/05
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
Health Economics – SOCE3B11 – Autumn 04/05
Global public goods: theory
versus practice


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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
Health Economics – SOCE3B11 – Autumn 04/05
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

Health Economics – SOCE3B11 – Autumn 04/05
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
Health Economics – SOCE3B11 – Autumn 04/05
Financing GPGH: who pays?

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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
Health Economics – SOCE3B11 – Autumn 04/05
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
Health Economics – SOCE3B11 – Autumn 04/05
GPGH conclusions

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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
Health Economics – SOCE3B11 – Autumn 04/05
Further references
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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.
Health Economics – SOCE3B11 – Autumn 04/05