http://yourlife.usatoday.com/health/story/2011-11-24/More-firms-using-incentives-to-prod-employees-to-fitness/51385970/1
http://www.nytimes.com/2011/11/17/health/policy/smokers-penalized-with-health-insurance-premiums.html
Over the past five years, health care costs have dramatically increased due in large part to a general unhealthy lifestyle led by many. Obesity has been directly linked to "higher rates of depression, absenteeism, low productivity, and more medical claims. An overweight employee costs employers $5,000 more a year in health costs than a healthy weight individual."One could say that this is an entirely personal issue, but I beg to differ. I think there is a clear externality involved here...
E.g. Suzie chooses to partake in a relatively active lifestyle and makes mostly healthy food choices. Because of this lifestyle, she gets a clean bill from the doctor during her once yearly physical exam and is less likely to develop a plethora of health problems ranging from diabetes, to high cholestorol, to heart issues. Bob, on the other hand, has never endured any kind of physical activity other than the stroll from his car to his office building, which leaves him winded. His daily diet consists of Big Macs and XXL Coca-Colas. Because of his lifestyle choices, he does develop health problems. Suzie and Bob work for the same company and because of people like Bob who cause 1000s of dollars in extra health care costs every year, and misses more work because of it, Suzie is forced to pay more in health care costs (or their employer covers less). Bob is not intending to cause higher costs for Suzie, but that is exactly what is happening. If that isn't a negative externality, I don't know what is! Although a tax is the common way to correct a negative externality, an "obese tax" might be a little silly or extreme.
More and more employers are recognizing the problems associated with unhealthy employees, and are starting to step up. The first article cited above is one of many which discusses the different ways in which employers are encouraging their employees to make healthy lifestyle choices. I think this is a great alternative to another stinking tax. Statistics show that individuals who work out more than three times a week have 44% lower health costs. Lower health care costs for a few lead to lower health care costs for many. If employers can start expecting that their employees will incur less medical costs, they can provide better rates for everyone. If more employers follow suit and encourage their employees to get in better shape, and therefore lead healthier lifestyles, the payoffs benefit everyone.
The second article cited talks about companies (Walmart in particular) who are penalizing smokers. I left smoking out of the previous argument because one, cigarettes are already taxed (and quite heavily in some places), and two, that discussion is much more controversial. But I do fully believe there is clear negative externality associated with smoking as well. I mean, if I'm in a bar as a non-smoker (obviously, not in Colorado, but many other states still permit smoking in public restaurants, etc.) and I'm surrounded by smokers, my health is largely affected, especially since second hand smoke is even worse for your health (because you are inhaling the smoke directly with NO filter). The effect may be unintentional, but it is happening nonetheless. Again, I'm not really looking to get in to the smoking argument, just another interesting article along the same lines.
I know this is easier for me to argue as a healthy indvidual, but I make choices that help me maintain that characteristic and I don't feel like people, like myself, should have to incur higher costs because others don't make the same choices. I'm not even talking about overweight, I'm talking obese, and there is a very clear difference. And yes, there are those out there who suffer from things like a thyroid problem which makes maintaining a healthy weight impossible, but those people are the minority without a doubt. Instead of penalizing those who CHOOSE (because nobody forces them to eat fast food and sit on their butts) an unhealthy lifestyle, it seems more positive and beneficial to encourage them to make healthier choices.
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While your analysis leading to the conclusion of a negative externality fits well with the analysis of many other economists, I want to suggest we have instead examples of "externality abuse."
You suggest Bob's actions imply a clear negative externality, but you do not quite make it clear you think the "external cost" involves higher insurance premiums for their employer. An externality is a cost that does not directly involve market values. My conclusion is that every one of the additional costs you suggest are internalized in the market for insurance, or would be without policy intervention. Insurers can identify healthier individuals and place them in a different insurance pool than less healthy. And, there is a profit incentive to do this. If you are thinking there are higher costs for services because more people are demanding doctor and hospital services, etc, this is also not an externality because the interaction is a market interaction (higher prices). If Bob is less productive, the free market rewards this less productivity with less income.
In the case of smoking externalities that presumably exist in bars or restaurants, I will suggest this too is externality abuse. Negative externalities exist when property rights are ill-defined. In this case the property rights are quite well-defined. The owner of the business has the right to use his or her property in any way as long as the person or property of another is not harmed. If I own the property and say no smoking, the smoker who enters my bar cannot smoke and cannot claim harm because he or she never has the right to use my property in any way. Likewise, if I own the property and say "if you got 'em, smoke 'em," then the nonsmoker who enters my property cannot claim harm because he or she never has the right to force others to use my property in a certain way, or to force me not to use my property as I wish. The nonsmoker has a very efficient remedy to discovering I allow smoking in my bar--leave.
Therefore I don't find negative externalities at all in these situations.
There may be inefficiencies today, but they won't be market failures. For example, government bans on smoking in privately owned restaurants are clearly inefficient, and they are this even if I agree that smoking in a restaurant makes a negative externality. Keep in mind that the efficiency amount of consumption of smoking that imposes an external cost is not going to be zero, and thus a ban is clearly inefficient.
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