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- [Alex] Hi, everyone.

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Today, I want to talk
about applying

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some of the principles
of economics,

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namely externalities
and incentives,

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to understand COVID
and vaccine policy.

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Let's begin with a simple flu shot.

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A flu shot is a great example of 
a good with a positive externality.

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When I get a shot, 
I benefit myself,

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but I also benefit other people

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because I'm less likely 
to transmit the virus.

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In fact, the economist 
Corey White has estimated

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that every two flu vaccinations
saves someone else

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from getting sick 
and having to miss a day of work,

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and every 4,000 vaccinations 
saves a life --

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that's an incredibly 
cost-effective way of saving a life.

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The problem is that even though
the social benefits are very high,

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people are unlikely to weigh
the social benefits

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as high as the benefits 
to themselves.

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So individuals are 
under-incentivized to get a flu shot.

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Now we deal with 
the external benefits

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of vaccinations 
in a variety of ways.

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In some cases, such as polio,

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we require school children
to be vaccinated by law.

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In other cases,
we offer incentives.

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We subsidize vaccines 
to keep the price low.

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It's not just government policy,
by the way.

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Some firms will offer 
their workers free flu shots --

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that's an interesting case 
where the employer internalizes

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some of the positive externalities 
from vaccination.

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COVID is especially fascinating

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because we can actually see
the externalities in market prices.

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Whenever one 
of the vaccine companies

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has even a little bit of good news,
say, from a clinical trial,

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the entire stock market jumps up.

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Airline stocks, for example --

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they jump up with every bit 
of good vaccine news.

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The airlines, in other words,
are capturing some of the benefits

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produced by vaccine manufacturers.

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And since the vaccine manufacturers
aren't capturing all of the gains

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from producing vaccines,

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the vaccine companies 
are under-incentivized.

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Now this is a case 
where economics leads you

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to a completely different conclusion
than the man in the street.

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The man in the street is worried
that the vaccine manufacturers

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will profit too much 
from a vaccine --

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that they will price gouge.

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The economist is worried 
that the vaccine manufacturers

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aren't profiting enough.

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By the way, innovations, in general,
are under-incentivized.

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The Nobel Prize-winning economist 
William Nordhaus has estimated

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that innovators -- they only receive 
about 2 to 2.5% of the value

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of their innovations.

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Now we do have some institutions
to try to alleviate this problem.

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We subsidize basic research 
in universities,

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and we offer firms patents, 
for example.

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But neither of these solutions 
is going to work well for COVID.

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It's too late to subsidize 
the basic research.

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And a patent is exactly 
the wrong idea.

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A patent raises the price 
above the competitive price,

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but we know the competitive price
is already too high.

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For a good with a positive externality 
like a vaccination,

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we want the price to be 
below the competitive price.

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So a patent creates 
a severe misallocation of resources.

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So what do we do?

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If we can't increase the profits 
of the vaccine companies,

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say, because of politics, 
we can cut their costs.

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That's one reason why 
Nobel Prize winner Michael Kremer,

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Susan Athey, 
Chris Snyder, and myself,

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working with a team of economists

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at accelerating 
health technologies --

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why we have proposed 
paying vaccine manufacturers

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part of their costs.

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Now, unfortunately, 
most vaccines fail,

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so, typically,
a vaccine manufacturer --

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they won't take the risk

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of getting a vaccine factory
up and running

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until after a vaccine has been 
proven safe and effective.

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But if we follow the typical route,

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we might end up 
with an approved vaccine

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and not enough capacity

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to get millions of shots
in arms for months.

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So what we want to do

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is pay firms to build
at risk capacity now.

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It's expensive to build 
a factory for a vaccine

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that may never be approved.

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But it's even more expensive
not to have a vaccine available

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the moment that one 
is proven safe and effective.

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In the U.S. alone, every month 
without a vaccine is costing

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thousands of lives 
and billions of dollars of GDP.

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So speeding a safe 
and effective vaccine

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is extremely valuable
and worth investing in.

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Okay, so there you have it:

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externalities, incentives,
innovation policy,

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using market design to improve 
social outcomes --

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these are key principles
of economics,

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and they can help us 
to improve policy in a pandemic.

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- [Narrator] If you're a teacher,
you should check out

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our classroom activity 
that incorporates this video.

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If you're a learner, make sure
this video sticks

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by taking a few quick 
practice questions.

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To learn more about
externalities, click here.

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♪ [music] ♪