Externalities In Healthcare

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Externalities are defined according to the OECD as ‘situations when the effect of production or consumption of goods and services imposes costs or benefits on others which are not reflected in the prices charged for the goods and services being provided.’ In the context of alcohol, overconsumption can lead to strain on the healthcare system to tend to those who suffer from the effects of alcohol, and the police force, who have to deal with increased crime. Furthermore, every industry sector is affected by the absenteeism due to overconsumption, resulting in lost revenue. In both these examples, members of the public have to bear the burden through taxes, hence motivation for taxing alcohol is to curb these effects and cover the cost to society of drinkers. …show more content…
Say a person is considering whether to drink alcohol or not. One will weigh up what they have to gain or lose from this. If one values the drink more than it costs them, it will be purchased, as the private benefits outweigh the private costs. However, if consumed in excess, that person might inflict unwanted costs on society, such as needing healthcare assistance. Here, the social costs (MSC) outweigh the social benefits (MSB), yet because to the drinker the private benefits were greater than the private costs (MPC), the drink was consumed regardless. Here, there is ‘spillover’ from the market, and overproduction means that the result is inefficient i.e. there is wellbeing left unaccounted for. Hence, one way to solve this is to increase the private costs, for example, through implementation of a

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