Saturday 22 May 2010

Fiscal externalities and personal choice

I'd previously raised sexual behaviour as a bit of a limit case of where interventions can wind up taking us if we want to tax or regulate any activity that imposes costs via the health system. I'd also worried that greater socialization of health costs leads to greater calls for such interventions.

And now Half Sigma's worrying about the public health costs of homosexual activity. There, the argument is explicit. Because of the public health system, whether ObamaCare, Medicaid, or prior restrictions on insurance company ability to set actuarily fair prices, we all have an interest in otherwise private risk-taking activities.

He previously linked to some evidence of relatively high rates of HIV among DC's gay community.

Of course, there's only an insurance externality here in private markets if the insurer were prevented from charging actuarily fair rates prior to disease onset; such regulations are one way that the costs of individual activity can be socialized.

In a Crampton-ideal world, we never would have had a publicly funded health system but rather income transfers to the poor coupled with mandates to purchase minimal catastrophic insurance coverage. Moral hazard problem solved. But if the political process has decided that it's better to socialize the costs of risk-taking because it's somehow unfair to charge actuarily fair insurance rates, then why is it not also unfair to charge Pigovean taxes on behaviour that would wind up effectively replicating, at rather high transaction cost, the actuarily fair insurance premiums? Or, worse, that we start taxing or regulating only those risk-taking behaviours that garner social disapprobation? I still hold that second best is to leave the fiscal externalities off the table. There is no obvious stopping rule that keeps us from moving from "people who smoke cost me money and should be taxed" to "people who have risky sex cost me money and should be heavily regulated as a per unit tax would be unfeasible".

I worry that calculations like Half-Sigma's are far more likely to lead to anti-gay sentiment than they are to lead to actuarily sound health insurance policies. It's not all that hard to imagine aggregate health spending figures on HIV/AIDS coming up in election campaigns in the redder parts of the US map a few years down the line....

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