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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,
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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
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 so, typically,
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a vaccine manufacturer --
they won't take the risk
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of getting a vaccine factory
up and running until
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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 to get
millions of shots in arms for months.
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So what we want to do 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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