Wednesday, August 20, 2014

What is Difficult to Include in Cost-Benefit Analysis?

A couple weeks back, I discussed what size and type of investment might be appropriate in response to the current Ebola outbreak.  I also discussed how the answer might vary between the United States and other locations around the world.  And I tried to place the discussion in the context of just how big a problem Ebola is (or is not) in comparison with other public health problems.  

There are two interesting thoughts that follow this coming out of a recent Wall Street Journal piece. The first, is that it is somewhat ironic that in a part of the world that is home to the natural resource that produces rubber, a number of health care providers have had incident cases of Ebola for a lack of rubber gloves.  This is a public health problem.  But it is also a problem that demonstrates just how important the many inter-linkages between different parts of an economic system are.  And how having the natural resources doesn't guarantee that without a production facility, a supply chain, or an export (and re-import) opportunity anything will be done with the resource to help to solve the public health problem.  For this, a cost-benefit analysis could be conducted, analyzing the cost of improving the system of moving the natural resource into production, the implications of any threats to the permanent viability of the natural resource (anyone who has ever read The Lorax knows what can happen with overuse of a resource), and the benefit of reducing the Ebola transmission.  There are markets.  We can infer values.  We can conduct the analysis.

But even this analysis would not capture the other aspect that was brought out in the WSJ piece.  What is that?  The article talks about health care workers going on strike to demand improved protection, higher "risk-based" pay, and life insurance.  Then the article states
"In the meantime, because doctors aren't at work, other diseases besides Ebola are going untreated. As a result, those ailments—chiefly typhoid and dysentery—may be killing more West Africans than Ebola, according to the United Nations Children's Fund."
This, is something that most cost-benefit analyses do not include and would honestly have a difficult time predicting.  This, is where the cost of an uncontrolled Ebola outbreak really begins to grow--and potentially exponentially.  

To some degree it is the difference between a partial equilibrium analysis (looking just at Ebola treatment) and a general equilibrium analysis (asking how treating Ebola will impact the rest of the health care system and ultimately the rest of the economy).  

What it demonstrates is how hard it can be to make a complete analysis using the tools we have when there are unpredictable outcomes.  And how policy makers and business leaders must still make decisions with the best information available.  And reassess the information and update the decisions frequently.

This is one case in which the economic argument for incremental spending to control the disease is much clearer in light of the information about the breakdown of usual work and social roles.  

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