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When producing, selling, buying, or consuming a good or service affects people other than those directly involved in the market exchange—for example, when a factory emits smoke that pollutes the air breathed by those in the vicinity—the economic activity is said to “spill over” and impose costs (or confer benefits) on people other than those directly involved in the transaction. Economists call spillover effects externalities. The extent of spillover effects in healthcare is one of several features that contribute to the failure of private markets to achieve efficient results and health-related outcomes relative to their costs. Externalities serve as one rationale for public-sector involvement in healthcare.

Spillover effects must be taken into account when evaluating the impact of healthcare services, their financing, and their delivery in ...

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