The Health Economics of Bads

No discussion of the health economy can be complete without addressing one of the most prominent and controversial issues—the consumption of health bads. In a market economy, we usually regard the consumer’s sovereignty as given, that is, the consumer is “free to choose.” However, we can find many exceptions in any society—cases where society encourages or discourages desired choices. We encourage and promote use of motorcycle helmets, automobile emissions-control devices, old-age pensions, and good prenatal care. We often discourage the purchase of alcohol, street drugs, and cigarettes. The reason to intervene in private decisions could be paternalistic, but it also could appeal to economic efficiency. Cigarette smoking affects not merely the cigarette buyer and seller—effects that are internal to the cigarette market—but also the health of nonsmokers nearby, an external cost. Since many health insurers do not distinguish between smokers and nonsmokers, perhaps because of high monitoring costs, nonsmokers may pay higher premiums than warranted by their actual health risks. The personal hazards of excessive alcohol consumption are also serious, including disability due to alcoholism and fatality due to liver disease. The external costs include possible harm to family or neighbors as well as the excessive, dangerous, and often-fatal traffic accidents due to drunken driving. Finally, when smokers and drinkers underestimate the probabilities of ill health due to their consumption, the imperfect information provides an efficiency rationale for measures, such as taxes, that tend to curb the behaviors. Economists as citizens may choose one side or the other of these controversies because their values are not determined by their being economists, but economists as scientists can illuminate the issues that are of interest to the public. For many, the question is not whether to intervene in private decisions to smoke or drink, but how to do so more effectively and unobtrusively. This hinges on many issues although two economic questions are central. First, what is the relationship of price to demand? Second, what is the relationship of product advertising to total consumption?

AN INTRODUCTION TO BADS
Economic reasoning is helpful for any approach to the analysis of bads, such as cigarette smoking and excessive alcohol consumption. Box 24-1 shows how consumption of alcohol and tobacco varies across countries. Economic models of addiction as well as market failure help determine whether intervention is justified on efficiency grounds. Alternatively, models of consumption, advertising, price, and taxation help provide relatively unobtrusive and cost-effective means to intervene, if we choose to do so.

Cigarettes qualify as bads, as follows from the high death rates attributed to cigarette smoking. Deaths per capita from respiratory cancers rank highest among national death rates from malignancies and rank second only to categories of heart disease overall. Motor vehicle deaths are less than half this rate, and only a handful of U.S. states have HIV/AIDS death rates that exceed one-half of the respiratory cancer rate. Cigarette smoking affects other disease categories as well, such as emphysema and heart disease. There is little doubt that convincing successive generations of youth to choose never to smoke would lower average population age-adjusted mortality rates (Table 24-1) substantially. Econometric studies of health production commonly find cigarette consumption to be a significant and materially important predictor of mortality rates.1 In contrast to smoking, moderate alcohol consumption does not necessarily harm people and may (according to some studies) benefit some. Yet, substantial harm occurs with excessive consumption and inappropriate related behaviors, such as drunk driving. Applying a novel means to identify the effect of drinking on traffic fatalities, Levitt and Porter (2001) found that drivers with “alcohol in the blood” are eight times as likely to cause a fatal accident as the sober driver. With “blood alcohol above legally drunk,” the ratio rises to 15 times. Alcohol use among both high

school and college students also raises policy concerns. College students who drink have poorer academic attainment (Cook and Moore, 1993; Williams, Powell, and Wechsler, 2003). High school drinkers are more likely to drop out before graduation (Chatterji and DeSimone, 2005). One approach is to assume that society has no grounds to intervene if the consumer chooses rationally and voluntarily, understands the risks, and creates no side effects for others. This view implicitly rejects all arguments not based on economic efficiency, including those grouped together as equity concerns and typically rejects other grounds as paternalistic. However, because alcohol and cigarette consumption are addictive, the issues of rationality, volition, and information take on closer scrutiny