June 2009 8th Issue

A01 Local News DAILY NEWS 11 June 2009

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Economics Express has been providing comprehensive economic analysis and information of current issues from different perspectives, on economic topics of social concerns, such as tainted

milk crisis and global financial crisis. There is a local outbreak of human swine flu (Influenza A H1N1) recently, leading to a 2-week school suspension of all kindergartens and primary schools in Hong Kong. The news focus in this issue will examine the costs and benefits of the free vaccines provided by the government.

The human swine flu is spreading all over the world while local confirmed cases continue increasing. The government is to seek HK$1 billion from the Legislative Council to buy 5 million doses of vaccines for free vaccination. The free vaccination is for 4 high risk groups: children aged 6 months to 6 years, those aged 65 and above, health care workers and people with pre-existing medical conditions. The government will reserve 1 million doses for a further 500,000 people who want to pay for the vaccination. It is estimated that 2.5 out of 7 million people would be protected by the vaccination in Hong Kong. The authority believed that there would be sufficient supply for the vaccination to prevent scare buying. The spokesperson from the Centre for Health Protection said that among the 300,000 eligible children, 80,000 of them participated in the Influenza Vaccination Subsidy Scheme for children last year.

Outbreak of human swine flu epidemic in Hong Kong – Analysis of the costs and benefits of the free vaccines *

2 million people to get free flu vaccination2 million people to get free flu vaccination

* Translated from Chinese

Economics Express June 2009

Hong Kong Educational Publishing Co.

Author: Kwok Wai Keung

Influenza is back again! After the battle with SARS, both the government and the people have increased their awareness of preventing epidemics. Confronting

the threat of the spread of the human swine flu, the government even considered providing free vaccination for the people. Below we will analyze the precautionary measure using the theories of the public goods and externalities.

Vaccines and public goods What are public goods?

Features of public goods1:

■ It can be consumed by different people at the same time.

■ Once a public good is produced, the marginal (extra) cost of serving additional consumers is zero. It means that the production costs of public goods will not increase even if there are additional consumers using it.

For example, the annual fireworks display on the second day of the Lunar New Year over the Victoria Harbour is a public good. First, the fireworks will not become dim when there are more people watching the display. Besides, the cost will not change regardless of the number of people watching it.

Paul A. Samuelson (1915 –), the 1970 Nobel Price Winner in Economics, believed that public goods should be provided by the government. Why? Once the public goods are produced, the marginal cost of serving additional consumers is zero. Therefore, the net benefits of the public goods to society will increase with the number of consumers. If the public goods were produced by the market, private enterprises must impose charges, which would reduce the net benefits to the consumers and the society. Hence, he believed that public goods should be produced by the government and the public should be allowed to consume the goods for free.

Vaccines possess the features of public goods

Technology or measures of epidemic prevention generally possess the features of public goods. Vaccine is one of the examples.

■ The formula of vaccine can be used by many people at the same time.

■ After successful development of the vaccine, the cost of development became a ‘historical cost’, which will not increase no matter how many people use it.2

According to the above analysis of public goods, when the vaccines are freely provided to the public by the government after successful development, the net benefits to society may increase.

1 Apart from the features mentioned, public goods are also difficult to be charged. For example, it is difficult to charge the audience for watching the fireworks display over the Victoria Harbour.

2 The production of vaccine can broadly be divided into 2 parts: development of the formula and manufacturing of the medicine. The formula is a public good. The cost of development will not increase even if the number of consumers using the vaccines increases. On the other hand, medicine is a private good and the cost of serving additional customers is positive. However, when comparing with the high cost of development, the per unit manufacturing cost of the medicine is relatively low. For the sake of simplicity, the per unit manufacturing cost is assumed to be zero.

Economics ExpressFebruary 2009

Hong Kong Educational Publishing Co.

Precautionary measures and externalitiesExternalities and inefficiency

In economics, everyone is a decision maker and all choices bring about benefits and costs. As individual behaviour (or choice) may affect others, economics classifies the cost (or the benefit) of an individual choice into:

■ Private cost (or benefit): the cost (or benefit) borne by the decision maker or the actor.

■ External cost (or benefit): the cost (or benefit) borne by other persons.

■ Social cost (or benefit): the total cost (or benefit) borne by everyone in society, that is, the sum of private cost and external cost.

In traditional economics, it is believed that both the external cost and external benefit would lead to inefficiency. The reason is that a maximizing individual will act according to incentives, i.e., the costs and the benefits. Higher costs will restrain the related behaviour, while greater benefits will encourage it.

■ When an individual does not need to bear the whole cost of an act, he tends to do more than what is deemed as desirable by society as there is insufficient constraint to his act. For example, the misbehavior of a student in class will bring harms to his classmates (and the teacher). If the constraints (such as punishment) are insufficient, the private costs of misbehaviour will be lower than the social costs at the margin, leading to ‘over-production’ of such misbehavior and a net loss to society.

■ On the contrary, an individual tends to do less when he is not the only beneficiary of his act. For example, if the examination results of a student are not based on his own performance but on the average performance of all students in class, his private benefits of studying will be lower than the social benefits, and he may spend less effort on studying, leading to ‘under-production’ of revision and a net loss to society.

Externalities to epidemic prevention

Epidemic is different from other diseases in that it is infectious. Anyone infected by the epidemic may infect others. Hence, the social costs of individual epidemic infection are higher than the private costs. On the other hand, individual epidemic precautionary measures have external benefits: a person receiving vaccination helps prevent the spread of the disease as this lowers the chance of other persons from being infected. Hence, the social benefits of having vaccination may then be greater than the private benefits. Moreover, some people may choose ‘free ride’ instead of paying for the vaccines. The result is that there will be too few people to have vaccination, hindering the work of epidemic prevention.

The free vaccines provided by the government will lower the costs of individual vaccination. This encourages more people to have vaccination, solving the above problems arising from insufficient incentives.

Conclusion — free vaccines are not free

The two analyses above are the rationale for the government to provide free vaccines. But there is no free lunch in the world. The free vaccines provided by the government are not really free goods. In fact, the above analyses are applicable to any epidemic. If the government provides free vaccines for all kinds of epidemics, the expenditures of public health care will be very high. It is worth considering under what circumstances should the government provide free vaccines to the public.

Poster of precautionary measures of swine flu.

Economics Express June 2009

Hong Kong Educational Publishing Co.

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Timeline of the outbreak of the human swine flu

Up to 12 June 2009, Influenza A H1N1 has spread to over 74 countries and regions, with 27,000 people being infected, including 141 deaths. Below is the timeline of the outbreak of the human swine flu:

April2009

May2009

June2009

1stHong Kong confirmed a case of Influenza A H1N1 which is the first case in Hong Kong and in Asia. The victim was a male tourist from Mexico.

12thThe first Influenza A H1N1 death was reported in a city in central Mexico.

25thThe Mexican City was closed for 10 days with all public activities cancelled.

7thThe first American died of Influenza A H1N1. The national confirmed cases rose to 642 in the US.

19thThe mainland confirmed the fourth case which is the first case in Guangdong.

19thThe number of confirmed cases rose to 163 in Japan, found mainly in Kobe and Osaka in the Kansai region. There was class suspension of 1.5 million local students.

12thWHO raised its pandemic alert status to the highest level—phase 6, which means that the world is in a full-blown influenza pandemic.

11thAfter a local confirmed case of Influenza A H1N1 of a S4 girl from St. Paul Convent School, 11 more c lassmates were confirmed being infected. The government announced a 14-day school suspension of all k indergartens and pr imary schools in Hong Kong.