Sometimes, external costs end up being internalized again. I wryly recognized that this week as I twitched while an emergency room nurse practitioner cut slits in my swollen but inadequately numbed thumb. She was draining fluid that had accumulated from an infection unfazed by a large injection of one powerful antibiotic and four days of horse-sized pills of another.
I was in pain, but I knew I was partially responsible for my plight. The fact that the infection had not responded to two different antibiotics resulted from decades of overuse of antibiotics in the United States and elsewhere. And as a farmer decades ago, I had contributed to that problem by feeding antibiotics to our sheep, hogs and cattle.
My infection illustrates two important economic phenomena: external costs and imperfect information.
External costs are costs to society as a result of some production or consumption activity that affects people other than the ones doing the producing or consuming. Pollution is a classic example. Such external costs may be entirely predictable or recognized only after the fact.
The development of effective antibiotics in the mid-20th century was a great achievement of modern medicine. The new compounds enormously reduced human suffering. They seemed miraculous and, when new, appeared to have no significant drawbacks.
It soon became clear they had uses beside treatment of human infectious disease. They were used to treat similar diseases in animals. And then, research showed that including “sub-therapeutic” amounts of tetracyclines like Terramycin and Aureomycin in animal feed reduced herd illness and promoted faster growth.
Perhaps scientists should have foreseen that feeding small amounts of these antibiotics to hundreds of millions of animals would hasten the day resistant bacteria would emerge. But the scientists did not, and by the time the problem was evident, the practice was so entrenched in animal production that there was a formidable lobby opposing its banning. Thus “imperfect information” was a major reason the external cost now exists.
Society did benefit from feeding antibiotics. Meat was at least marginally more plentiful and less expensive than it would have been otherwise. But the practice also hastened the day when there would be many bacteria, evidently including the ones in my thumb, that would be resistant to whole classes of drugs.
Such resistance and the illness and suffering that result are significant external costs of past misuse of these drugs. They are costs that grow as more diseases, such as tuberculosis, become resistant to historically effective treatments and as MRSA (Methicillin-resistant Staphylococcus aureus) infections afflict more and more people, including my wife and her mother.
Lacing animal feed with antibiotics was not the only cause. Over-prescription of antibiotics for humans probably played an even bigger role. And even with strict discipline in prescribing them, evolutionary biology is such that resistances would have emerged eventually in any case. But that could have been delayed much longer if we had used these drugs more prudently.
So infections like mine are an external cost of overuse of antibiotics fostered by highly imperfect information about all the effects of the new pharmaceuticals. What could have been done to prevent this?
When there are significant external costs or imperfect information, markets free of any government action don’t necessarily result in outcomes that are optimal for society. That is unquestioned in economic theory and repeatedly demonstrated in economic history.
For most economists, such failures of free markets justify action by government as long as there is a reasonable expectation that such action can produce a better outcome. But this is anathema for most Libertarians like the late Milton Friedman or Ron and Rand Paul.
Friedman argued we would be better off without the Food and Drug Administration. Companies should be allowed to sell whatever drugs they wanted, he argued, and consumers allowed to buy whatever they saw fit without government interfering.
The logic was that just as people find out which cars are good or bad based their observations of how other people like different models, consumers eventually would find out which drugs worked and which ones didn’t and would purchase accordingly. Companies that made safe and effective drugs would be profitable, and ones that made bad drugs would go broke. Anyone harmed by a bad drug could sue for damages.
That all depends on an assumption of a superhuman ability of people to discern the safety and effectiveness of thousands of different products. For most economists, such accurate information is impossible. Society is better off with some government action to compile information on drug safety and effectiveness and to regulate drug manufacturing and sale.
Libertarians will respond that we have had the Food and Drug Administration for a century, and we still ended up with drug-resistant bacteria. True enough; but most pragmatic people agree we have far fewer problems with the FDA than we would have without it.
As voters face increasing numbers of candidates like the Pauls, who favor drastic reductions in the role of government, they will have to make their own judgments about the wisdom of such a policy for our society.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.