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Dictionary of Evidence-based Medicine.pdf

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60 <strong>Dictionary</strong> <strong>of</strong> <strong>Evidence</strong>-<strong>based</strong> <strong>Medicine</strong><br />

Figure 8 Exponential survival model<br />

Externality<br />

Allocative efficiency occurs when the marginal benefits equal the marginal<br />

costs. In a number <strong>of</strong> instances, the marginal private cost (that which the<br />

consumer pays) does not fully reflect the marginal cost to society. A classic<br />

example arises when manufacturing <strong>of</strong> a particular product causes pollution.<br />

The additional cost <strong>of</strong> cleaning up the environment is not usually<br />

reflected in the market price <strong>of</strong> the product and can hence be viewed as the<br />

subsidy provided by society to the consumer <strong>of</strong> the product. Such costs<br />

are referred to as external costs or externalities. In the presence <strong>of</strong> a negative<br />

externality (E), a quantity (Ql) which is more than the optimum<br />

quantity (QO) <strong>of</strong> the product is produced and the resources are not allocated<br />

efficiently (Figure 9). Externalities can be positive too. For example, by<br />

vaccinating a child, not only is the child better protected from the potential<br />

invading micro-organism but society as a whole benefits from lower transmission<br />

rates <strong>of</strong> the infection through the development <strong>of</strong> herd immunity.<br />

It has also been argued that human beings generally do not like to see<br />

others suffer from untreated illness and that they care for the welfare <strong>of</strong><br />

others. Therefore, there is associated with health care a positive caring<br />

externality (Culyer AJ (1980) The political economy <strong>of</strong> social policy. Martin<br />

Robertson, Oxford).

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