Vaccines have been in the news recently, as diseases that were once eradicated make a resurgence in areas where children have not received immunizations. While this is clearly a public health perception problem, as vaccines are safe, effective, lifesaving, and do not cause autism, that is not the focus of this blog post. Rather, vaccines are an interesting, real-world example of the economic concept of externalities.
For any decision, the decision maker considers the personal costs and benefits of the decision. For example, when deciding between buying a lavender shirt or a white shirt, the decision maker weighs the pros of having a shirt that is a fun color versus a shirt that will match more outfits. Regardless of whether the decision maker chooses the lavender or white shirt, they bear all the effects of the decision—no one else is harmed or benefits from the color of the shirt or fashion possibilities of the shirt. In this instance, the costs and benefits are internal only to the decision maker and do not affect anyone else. Similarly, the decision maker will end up of the number of shirts that they want, and this number is no different than the optimal number of shirts from a societal perspective as well.
However, this is not true for all types of actions. Though one person (or entity or business) may make a decision by themselves or with only their own interests in mind, the results could affect others. Since we assume in economics that the decision maker is going to act in their own “rational self-interest” (a fancy way of saying that they will do whatever is best for them), they tend to minimize or ignore the larger effects. These additional effects are called externalities because they are external to the decision maker. Externalities can be positive if the external effect benefits society; they are negative when the external effect harms society. When an externality exists, the private market will not result in the optimal level of a good or service, since the people making decisions are not taking into account the full impact to society of their actions. Positive externalities (more on these later) are underprovided by the private market since the positive value of the action is ignored, while negative externalities (for example, pollution from a smokestack that makes people sick) are overprovided since their costs are ignored.
Let’s return to our example of vaccines and consider the costs and benefits. As a person who has been vaccinated against the measles, I bore the cost of the shot as well as the temporary discomfort from the injection. On the other hand, the benefits are that I will not contract measles (a benefit to me), nor will I infect anyone who has not been vaccinated against measles (for example, babies who are too young to be vaccinated or individuals who are immunocompromised and cannot receive the vaccine for medical reasons). In this case, while there is a benefit to me, there is also a larger external benefit that extends beyond me personally. When enough people in a population are vaccinated, those who cannot receive vaccines are also protected from the disease; this is called herd immunity.
So what do we do about externalities? Since we know that the private market will not result in the societally optimal level of an externality (as we see with costly outbreaks of diseases that had been eradicated), there is the opportunity for policy to help bridge the gap. For example, the Centers for Disease Control and Prevention oversees the Vaccines for Children program that provides vaccinations for youth who might not otherwise receive them due to the cost. Additionally, the State of Maryland requires that children enrolled in preschool, K-12 schools, and institutions of higher education be vaccinated. These programs and policies help to “internalize the externality” by making the decision to get vaccinated an easier one to make, which then benefits society as a whole.