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- [Alex] Hi, everyone.
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Today, I want to talk about
applying some of the principles
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of economics, 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
save 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,
we require school children
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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
because we can actually see
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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,
they jump up
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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