Worksheet on Positive Externalities
Developed as part of the QUILT FE training project
This worksheet was prepared by:
- Duncan Webster - New College Swindon
- Nick Burnham - Peter Symonds College
- Dennis Bransky - Hendon College
This worksheet has been developed to help you to understand the issues connected with positive externalities. It uses a number of sources of data and information which are available on the Internet. To answer the questions follow the highlighted links (or the Internet address given in brackets) to access the information you will need to complete this worksheet.
Aims:
To be able to
- understand, and distinguish between, private, external and social benefits.
- identify examples of positive externalities in the real world.
- evaluate the efficiency of the market mechanism in the provision of health care.
- analyse possible approaches to dealing with market failures in health care.
Step 1 - Externalities - external to who or what?
Use The FACS Journalist's Guide to Economic Terms (http://www.facsnet.org/tools/ref_tutor/econo_term/glossary.html) to look up definitions for the following terms:
Externalities
Efficiency
Social costs
Positive externalities are the benefits accruing to third parties, that is, to parties other than those involved in the original transaction.
From the definition you have got for social costs work out what you think is meant by social benefits:
Social benefits
Say that private health care is privatised. If, under these circumstances, the demand for health care amounts to £10 billion and the external benefits amounts to £5 billion then what will the total benefits will be? Fill them in below:
External benefits =
Private marginal benefits =
Social marginal benefits =
Allocative efficiency and positive externalities.
Where there are external costs or benefits, the price mechanism will not work properly. Firms and consumers will only tend to take account of private costs and benefits in their actions and so the external costs or benefits will be ignored. To get the optimum allocation of resources we must make sure that the price charged in the market does reflect the external costs or benefits. Therefore:
- When private marginal benefits equal private marginal costs, private allocative efficiency occurs.
- When social marginal benefits equal social marginal costs ................................. occurs.
Complete the above sentence.
Step 2 - Inoculations - an internal or external benefit?
Inoculations against contagious diseases such as measles and rubella, provide both private (internal!) benefits and external benefits. What are these benefits?
Private benefits?
External benefits?
To identify the benefits of measles inoculations, we are going to investigate the incidence of measles and compare it to the percentage of the population inoculated against the disease.
Use the Web site of the World Health Organisation (WHO) (http://www.who.int)
Once you are on the site:
- Select Information Sources
- Select WHOSIS
- Select WHO Databases
- Select immunisation EPI information systems
In the table below compare the coverage and incidence data for Europe, USA and Africa for 1996.
| Continent | Incidence (1995) | Inoculations % |
|---|---|---|
| Europe | ||
| USA | ||
| Africa |
N.B. Remember to use the total figures for each area.
There are weaknesses in comparing the data in the incidence column. How would you prefer the data to be measured in order to compare the continental data properly?
However, even within these figures there are some enormous variations. Use the WHO databases (http://www.who.org/) again, and this time find the figures for incidence and the % of inoculations for measles for the UK, Italy, Austria, Finland and Belgium.
| Continent | Incidence (1995) | Inoculations % |
|---|---|---|
| UK | ||
| Italy | ||
| Austria | ||
| Finland | ||
| Belgium |
Why do you think these differences may have arisen?
What effects might you expect on the economies of those countries with the lowest level of inoculations?
Step 3 - Inoculations - are they catching?
Use the WHO (http://www.who.org/) site once again and look for the following:
- Find the global health-for-all indicators
- Get data for the UK, USA and Australia on total government expenditure on health as a percentage of GNP
Use this to fill in the table below:
| Country | Total national health expenditure as a % of GNP | Total govt. health expenditure as a % of GNP | DIFFERENCE |
|---|---|---|---|
| United Kingdom | |||
| United States | |||
| Australia |
What does the difference column represent?
The diagram above shows the marginal social costs and benefits of inoculation against measles. Using your research above on health care provision in the UK and USA and your knowledge of social costs and benefits answer the following questions:
- Mark on the graph the quantity of inoculations provided by the American system according to MSC/MSB analysis.
- Mark on the graph the quantity provided by an allocatively efficient system.
- Where would you place the UK on the quantity axis ?
- Explain the difference between your answers to the first three questions.
- Shade the welfare loss triangle on the graph. Explain why this represents a welfare loss to society.
- Using the diagram explain why it could be possible to over-provide immunisation.
Step 4 - Immunisation issues
The economic benefits of immunisation are now clear, but things are rarely that simple in practice. Using a newspaper archive site (for example the Electronic Telegraph (http://www.telegraph.co.uk)), try to find recent articles about a vaccination or immunisation controversy (for example Measles, Mumps and Rubella (MMR) vaccinations?).
Write a short summary of the issues involved:
What are the benefits (private and external) of this particular immunisation programme?
What are the costs (private and social)?