Cost–Benefit Analysis and Health Care Evaluations, Second Edition
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Cost–Benefit Analysis and Health Care Evaluations, Second Edition

Robert J. Brent

Cost–benefit analysis is the only method of economic evaluation that can effectively indicate whether a health care treatment or intervention is worthwhile. In this thoroughly updated and revised second edition, Robert Brent expands the scope of the field by including the latest concepts and applications throughout all regions of the world. This book attempts to strengthen the link between cost–benefit analysis and the mainstream health care evaluation field, which is dominated by non-economists. The need to build a bridge between the two is more important than ever before, as the general understanding of cost-benefit analysis appears to have regressed.
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Chapter 4: External costs

Robert J. Brent


We have just seen, in Chapter 3, one reason why market prices may not reflect costs, that is, because markets may be imperfect. When external effects exist, even perfect market prices may be incorrect indicators of social value. The competitive market equilibrium output with external effects could be under or over the level that is most desirable. We first define an external effect and explain how this drives a wedge between private and social evaluations. We next look at the relation between external effects and markets. Then we extend the analysis to consider external effects when there are two interdependent markets and accommodate situations where external effects vary over time. The theory and the applications mainly focus on the external costs involved with alcohol-related driving accidents and the external benefits of preventing contagious diseases.

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