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 5: Social cost of taxation

Robert J. Brent


There are two types of external costs. One type, analyzed in the previous chapter, has to be estimated on a case-by-case basis. It is due to the fact that a market, irrespective of whether it is perfectly competitive or not, may fail to record the value of certain inputs. The other type, examined in this chapter, is usually independent of the particular health care expenditure being evaluated. The public sector is now assumed to be undertaking the health care expenditure. So tax revenues must be increased to finance it. Any cost involved with levying the taxes to pay for the public expenditure, over and above that entailed in the giving up of the revenues themselves, is an extra cost which needs to be included in an overall assessment of the health care expenditure. The total cost of paying taxes is called the ‘marginal cost of public funds’ (MCF). This is related to both the utility loss of paying the tax revenue itself and the extra external cost. Our first task is to explain what the MCF is and how it affects an evaluation of health care expenditure. Then we examine how the extra cost comes into existence and what economic principles determine its size. From there we proceed to present actual estimates of the MCF. Finally, we identify situations when an MCF can be excluded from considerations. The applications emphasize what difference it makes to health care evaluations by including the MCF as a separate ingredient.

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