He Gets Vaccinated So He Can Get Kissed

Lynne Kiesling

Over at Marginal Revolution Alex reveals that he has gotten a flu shot, and uses that fact to draw out a brief analysis of the external benefits that he does not entirely get to enjoy from his shot: his shot reduces contagion, reducing illness in others, which has only a small benefit that redounds to him. He closes by asking for suggestions on how to encourage more people to get flu shots, short of flat-out coercion and mandatory flu shots.

Let’s turn Alex’s point on its head. Alex gets a flu shot because he wants to get kissed.

The primary reason Alex gets a flu shot is to reduce his (and his family’s) probability of illness. A second reason may be to reduce the illness probability facing his friends. A third reason may be to reduce the illness probability facing his students.

This is the crucial point to remember whenever anyone starts talking about tax or subsidy policies to “internalize externalities”: at the margin, the greatest beneficiary of Alex’s action is Alex. If the marginal benefit to him of getting the shot is larger than the marginal cost, then he’ll do it, even if we don’t have some elaborate scheme of subsidies to compensate him for the benefit he generates for us. If his desire to prevent illness in himself and in his close circle is high enough, he’ll do it, and any payment we make to him at the margin could be inframarginal; it might not change his behavior.

That case is what Buchanan & Stubblebine (Economica, 1961) classified as a Pareto-irrelevant, or just irrelevant, externality. In that case, a system of payments provides nothing more than a wealth transfer without changing the actual amount of the beneficial behavior that occurs.

Note the important policy implication of this insight: not all externalities need to be eliminated to achieve efficiency and the optimal amount of the behavior in question. In an efficient equilibrium, externalities still exist, it’s just that they are inframarginal.

So let’s sharpen Alex’s question. What is a good policy for ensuring that Pareto-relevant externalities are reduced or eliminated? How do we determine if an externality like the one he’s describing is relevant or irrelevant?


3 thoughts on “He Gets Vaccinated So He Can Get Kissed

  1. Given the Alex did not alter his behavior on the expectation of payment, any payments to him will be a pure wealth transfer.

    On the other hand, I haven’t received a flu shot yet, and usually don’t get one. So credible offers of payments to me can effect socially desirable behavior.

    So, make me a compelling offer, and help make the world a better place!

  2. Lynne/Mike,

    I presume that taking the non-economic aspects of this discussion from influenza to energy would not be taking the discussion off-topic here.

    The following sentence was included in a comment on another blog by another very senior technologist in a discussion regarding internalizing the environmental externalities of fossil fuel combustion.

    “It is strictly a scientific exercise, determining the health, environmental and geopolitical impacts of various energy options.”

    That is certainly a mouthful! However, it succinctly describes the challenge of establishing the “correct” values for environmental externalities costs, even though it ignores the reality that such a scientific exercise could hardly be allowed to proceed to a conclusion without political influence.

    The quote frames the current debate in the US Congress regarding the establishment of a “cap & trade” scheme for anthropogenic CO2 emissions reductions versus the implementation of a carbon tax. It obviously focuses the discussion on the “damage cost method” of establishing environmental externalities costs.

    One obvious element that is missing, however, is a discussion of the level of emissions reductions which must be achieved to reach the economic optimum. While “cap & trade” would establish a specific level of emissions reductions which must be achieved, it is unclear whether that level would represent the global economic optimum. A carbon tax, on the other hand, would bring emitters to a set of specific economic optima which might well also not represent the global economic optimum.

    Determination of the level of emissions reductions which must ultimately be achieved, early in the process, is essential if massive economic dead loss is to be avoided, since many of the investments which would be required to be made to achieve the required reductions have anticipated useful lives of 40-60 years.

    It is economically critical that we not begin vast programs with half-vast ideas, since the investments required nationally are likely in the $10-30 trillion range; and, the investments required globally may well approach $100 trillion.

    At the risk of disturbing the reposing soul of the late Everett McKinley Dirksen (R, IL): A trillion here, a trillion there, pretty soon you’re talking about real money.

  3. Lynne/Mike,

    I presume that taking the non-economic aspects of this discussion from influenza to energy would not be taking the discussion off-topic here.

    The following sentence was included in a comment on another blog by another very senior technologist in a discussion regarding internalizing the environmental externalities of fossil fuel combustion.

    “It is strictly a scientific exercise, determining the health, environmental and geopolitical impacts of various energy options.”

    That is certainly a mouthful! However, it succinctly describes the challenge of establishing the “correct” values for environmental externalities costs, even though it ignores the reality that such a scientific exercise could hardly be allowed to proceed to a conclusion without political influence.

    The quote frames the current debate in the US Congress regarding the establishment of a “cap & trade” scheme for anthropogenic CO2 emissions reductions versus the implementation of a carbon tax. It obviously focuses the discussion on the “damage cost method” of establishing environmental externalities costs.

    One obvious element that is missing, however, is a discussion of the level of emissions reductions which must be achieved to reach the economic optimum. While “cap & trade” would establish a specific level of emissions reductions which must be achieved, it is unclear whether that level would represent the global economic optimum. A carbon tax, on the other hand, would bring emitters to a set of specific economic optima which might well also not represent the global economic optimum.

    Determination of the level of emissions reductions which must ultimately be achieved, early in the process, is essential if massive economic dead loss is to be avoided, since many of the investments which would be required to be made to achieve the required reductions have anticipated useful lives of 40-60 years.

    It is economically critical that we not begin vast programs with half-vast ideas, since the investments required nationally are likely in the $10-30 trillion range; and, the investments required globally may well approach $100 trillion.

    At the risk of disturbing the reposing soul of the late Everett McKinley Dirksen (R, IL): A trillion here, a trillion there, pretty soon you’re talking about real money.

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