Monday, February 13, 2012

Economist's Notebook: Externalities

I am very fearful of wading into a morass of politics and values but this essay criticizing the mandate that health insurance cover birth control struck me as particularly odd coming from an economist:
I put "insurance" in quotes for a reason. Insurance is supposed to mean a contract, by which a company pays for large, unanticipated expenses in return for a premium: expenses like your house burning down, your car getting stolen or a big medical bill.

Insurance is a bad idea for small, regular and predictable expenses. There are good reasons that your car insurance company doesn't add $100 per year to your premium and then cover oil changes, and that your health insurance doesn't charge $50 more per year and cover toothpaste. You'd have to fill out mountains of paperwork, the oil-change and toothpaste markets would become much less competitive, and you'd end up spending more.
Okay, so we can quibble about the semantics of insurance, but there is a huge difference between oil changes and contraception: externalities. The social costs from someone not taking proper care of their car is pretty small - it may run less efficiently and release more smog, for example, but most of the cost of poor maintenance will be born by the owner. Unwanted pregnancies can have major social costs born by society at large - health care, infant care, foster care, crime (if you believe Levitt) and so on. In econo-speak, there are large negative externalities that come from unwanted pregnancies.

So there is a good reason government stays out of the decision to get an oil change for your car, but potentially has a big stake in helping prevent unwanted pregnancies.

The author does finally mention the externality issue near the end:
But what about the fact, you may ask, that unwanted children are a burden on society as well as to their mothers? Perhaps there is a social interest in subsidizing birth control? Perhaps there is—but if so, this is an awful way to do it.
Which is, in my mind, the same as admitting the whole essay is about obfuscating by referring to a red herring.  Yes, the real question is whether it makes the most economic sense to subsidize birth control in this way.  Politically, perhaps, this this the only realistic alternative, but that discussion is the right one to have.  Talking about oil changes and toothpaste is completely beside the point.  And besides, this incorporates the subsidy in the private sector rather than making another government program, something that is supposed to be preferred.

So discuss away whether the externality is big enough to warrant intervention into the private birth control market, whether there is an efficient solution that can correct the market failure and if this program is the best way to do it.  But don't deliberately distort the issue by talking about oil changes in cars.

1 comment:

jessibeaucoup said...

I don't think there is any question that the externalities of rampant and unwanted pregnancies are huge. And, even if you don't count those costs, which, again, are HUGE, just comparing the actual costs of the average pregnancy to the actual costs of contraception should be enough for most reasonable people to see a financial benefit to providing coverage for contraception.