Elsevier

Journal of Health Economics

Volume 21, Issue 6, November 2002, Pages 1071-1083
Journal of Health Economics

Economic implications of antibiotic resistance in a global economy

https://doi.org/10.1016/S0167-6296(02)00053-XGet rights and content

Abstract

This paper concerns the economic implications of antibiotic resistance in a global economy. The global economy consists of several countries, where antibiotic consumption creates a stock of bacteria which is resistant to antibiotics. This stock affects the welfare in all countries because of the risk that resistant bacterial strains may be transmitted. The main purpose of the paper is to compare the socially optimal resource allocation with the allocation brought forward by the decentralized market economy. In addition, a dynamic Pigouvian tax designed to implement the globally optimal resource allocation is presented.

Introduction

Ever since the discovery of penicillin in 1928, antibiotic resistance among bacteria has been causing concern within the medical profession. The increase in antibiotic resistance is reported to be due to the extensive use of antibiotics worldwide Finland, 1979, Levy, 1982, McGowan, 1983. The global implications of the development of resistant bacterial strains in any one country is one important aspect of the problem. In fact, Taxue et al. (1990) found that the best predictor of resistance in Shigella, a food-borne bacteria who causes diarrhea, was a history of foreign travel by the patient. The importance of the geographical transmission of resistant bacteria is also discussed in Cohen’s (1992) article on the epidemiology of drug resistance. Cohen fears that the problem of drug resistant bacteria might increase as international travel makes the transmission of such bacteria more frequent. As such, the use of antibiotics in any particular country affects the well-being of the population in other countries.

This paper concentrates on two aspects of the resistance problem. Firstly, the use of antibiotics in one country is assumed to lead to the development of a resistant bacterial strain, which might cause disease in neighboring countries as well. Assuming that these countries play a non-cooperative differential game, taking the level of antibiotic use in other countries as given, this results in a suboptimal resource allocation at the global level. Secondly, the health of the consumer is assumed to affect output in each country. As the consumer does not recognize this relationship between health and output when choosing the level of antibiotic consumption, an externality in the production of goods arises.

One purpose of the paper is to compare the socially optimal allocation of resources, at a global level, with the allocation in a non-cooperative differential game between countries. Another is to analyze the resource allocation brought forth by a decentralized market economy without any policies to control the use of antibiotics. A final concern is to design the Pigouvian tax/subsidy system required to make the market economy reach the globally optimal resource allocation.

Most of the earlier studies concerning the economic impact of antibiotic resistance concentrate on the direct costs arising from prolonged hospitalization and increased mortality Carmeli et al., 1999, Holmberg et al., 1987, Liss and Batchelor, 1987. Holmberg et al. (1987) report that the length of the hospital stay is at least twice as great for patients infected by resistant bacteria compared with patients infected by antibiotic susceptible ones, although they do not estimate the cost increases caused by prolonged hospitalization. Liss and Batchelor (1987) argue that, as policies to restrict the use of antibiotics are being adopted, the pharmaceutical industry loses part of its economic incentive to develop new antibiotic substances designed to combat resistant bacteria. Carmeli et al. (1999) report that the national cost of antibiotic resistance in the US lies somewhere between US$ 100 million and US$ 30 billion annually. However, despite presenting these estimates, Carmeli et al. (1999) admit that there is a lack of studies that thoroughly examine the costs arising from antibiotic resistance. Although there appear to be differing opinions about the actual size of the costs, it seems nevertheless to be a widespread view that antibiotic resistance increases treatment costs.

Tisdell (1982) was the first to study antibiotic resistance as a utility maximization problem. He assumes that the drugs are effective only for a finite number of exposures, and that there is free access to this drug for a given cost. Tisdell then uses a two period model and shows that without intervention, there will be extensive antibiotic use in the first period, rendering them useless in the second period. In order to reach a first best equilibrium, he suggests that the government should either regulate first period consumption of antibiotics or grant monopoly rights to the sellers of antibiotics.

Brown and Layton (1996) set up a dynamic model where a consumer maximizes the utility of antibiotic treatments and a farmer is maximizing the net benefits of antibiotic use in agricultural production. Both the consumer and the farmer take the effectiveness of antibiotic treatments as exogenously given, ignoring the impact of their antibiotic use on treatment efficiency. The social planner maximizes social welfare from antibiotic use, taking the resistance problem into account. A comparison of the different resource allocations shows that both the consumer and the farmer choose a higher level of antibiotic consumption than the social planner. However, Brown and Layton do not suggest any corrective policy to be implemented.

This paper contributes to the literature in at least three ways. First, this is (at least to my knowledge) the first attempt to analyze the problem of antibiotic resistance in a dynamic general equilibrium context. Second, the global aspects of antibiotic resistance are addressed. Finally, a dynamic Pigouvian tax is presented that is designed to internalize all external effects arising from antibiotic use at the global level.

The type of model used in this paper has earlier been used to analyze different aspects of environmental problems. In a recent paper, Aronsson and Löfgren (2000) analyze the global implications of transboundry pollution in a Nash non-cooperative differential game, as well as in the uncontrolled market economy, and suggested a Pigouvian tax to reach a globally optimal resource allocation in a setting quite similar to mine.

The paper is set out as follows. In Section 2, I describe the model. Section 3 presents a non-cooperative differential game between countries, while Section 4 analyzes the global social optimum. The difference between these two equilibria is that the Nash equilibrium does not internalize the part of the externalities which is due to the interaction between countries, whereas all externalities are internalized at a global level in the social optimum. In Section 5, I examine the resource allocation in the uncontrolled market economies. The policies required to make the agents in the decentralized economy choose the socially optimal resource allocation are discussed in Section 6. Section 7 concludes the paper.

Section snippets

The settings

Assume that there are I countries in the global economy.1 In addition, to focus on the external effects of antibiotic use, I shall disregard international trade between the countries. The population in each

A description of the game between countries

The problem of antibiotic resistance has been given increased attention by governments around the world. However, it seems as if individual countries are adopting their own programs to fight the problem by creating national organizations with the purpose of fighting antibiotic resistance.

The globally optimal resource allocation

I now turn to the task of describing the optimal resource allocation, were all externalities have become internalized at the global level. The results from this section will later be used when designing the Pigouvian taxes which makes the market economy reach the global optimum.

The optimization problem facing a global utilitarian social planner can be written as a standard control problem with an infinite time horizon. To derive the globally optimal equilibrium, where all externalities have

The uncontrolled market economy

In most countries, the resource allocation is determined by some form of controlled market economy. In such economies, decision makers use economic policy, such as taxes and subsidies, in order to internalize external effects. In the following sections of the paper, I will show that the globally optimal solution can be implemented in the market economy.7

The next two sections thus

Implementing the cooperative equilibrium

In order to implement the cooperative equilibrium a tax on antibiotic sales, τi(t)ai(t), is introduced. The objective function of the antibiotics producer changes to become: πi2(t)=pi(t)ai(t)−ςi(ai(t))−τi(t)ai(t)

The tax revenue is returned to the consumer as a lump sum transfer, Ti(t). The government in country i is assumed to balance the budget at each instant, that is τi(t)ai(t)−Ti(t)=0The representative consumer then solves: Maxci(t),ai(t)0[ui(ci(t),hi(t))]e−θtdtsubject to dki(t)dt=ri(t)ki

Summary

The purpose of this paper is to analyze the global and national economic aspects of antibiotic resistance in bacteria. The socially optimal resource allocation is compared with the unrestricted market solution, as well as with a non-cooperative Nash equilibrium.

It is assumed that antibiotic consumption creates a stock of resistant bacteria which affects the welfare of the consumers in all countries because of the risk of transmission of resistant bacterial strain between countries. Health, and

Acknowledgements

The author would like to thank Thomas Aronsson, Runar Brännlund, Tomas Sjögren, Magnus Wikström and all participants in a seminar at UmeåUniversity for helpful comments and suggestions. Financial support from the Browaldh–Wallander–Hedelius foundation is gratefully acknowledged.

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