The presence of economic costs attributable to ill health
per se does not necessarily mean that there is reason
for government to act, from an economic perspective
(see box 2.1 and box 2.2 for a discussion on the use
of “economic cost” or “economic burden” evidence).
A rationale for public policy intervention based on the
economic perspective differs markedly from a public
health rationale. According to standard economic theory,
public intervention is justified when private markets fail to
function “efficiently”. Efficiency is defined by economists
in a very specific way: an allocation of resources is
efficient if there is no way to increase benefits to an
individual without making another individual worse off
(this concept is known as “Pareto efficiency”). Likewise,
an allocation is inefficient when it is possible to make one
individual better off without harming anyone else. Intuitively,
an inefficient allocation represents a certain waste of
resources, either because there exist ways to produce
more (or more generally, achieve better outcomes) with
the same amount of inputs or because some resources
are assigned to individuals who value them less than
what other people are willing to pay for them. In these
cases there are possibilities of reallocation that allow
the economic system to prevent waste. When markets
fail to achieve efficiency, there is scope for governments
to intervene. Government interventions typically consist
of regulations, direct production, taxation and, more
generally, redistribution policies.
When markets achieve efficiency, the sovereignty of the
consumer – the overriding principle in standard economic
textbooks – is hard to challenge. In this world view,
individuals are able to reach the maximum welfare possible
and government intervention is but an afterthought. Indeed,
any intervention would create distortions and produce
inefficient allocations. The efficiency situation, however,
hinges on quite restrictive assumptions, difficult to be
met in reality, in particular that:
• this decision-making is based on sufficiently accurate
– or “perfect” – information about the consequences
of the decision (for example, that we are all fully
informed of the consequences of the decision to smoke