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- [Alex] Hi, everyone.

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Today, I want to talk[br]about applying

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some of the principles[br]of economics,

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namely externalities[br]and incentives,

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to understand COVID[br]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 [br]a good with a positive externality.

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When I get a shot, [br]I benefit myself,

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but I also benefit other people

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because I'm less likely [br]to transmit the virus.

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In fact, the economist [br]Corey White has estimated

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that every two flu vaccinations[br]saves someone else

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

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and every 4,000 vaccinations [br]saves a life --

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

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

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people are unlikely to weigh[br]the social benefits

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as high as the benefits [br]to themselves.

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

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Now we deal with [br]the external benefits

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of vaccinations [br]in a variety of ways.

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In some cases, such as polio,

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we require school children[br]to be vaccinated by law.

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In other cases,[br]we offer incentives.

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We subsidize vaccines [br]to keep the price low.

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

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Some firms will offer [br]their workers free flu shots --

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that's an interesting case [br]where the employer internalizes

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some of the positive externalities [br]from vaccination.

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COVID is especially fascinating

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because we can actually see[br]the externalities in market prices.

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Whenever one [br]of the vaccine companies

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has even a little bit of good news,[br]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 [br]of good vaccine news.

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

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produced by vaccine manufacturers.

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

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from producing vaccines,

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the vaccine companies [br]are under-incentivized.

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Now this is a case [br]where economics leads you

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to a completely different conclusion[br]than the man in the street.

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The man in the street is worried[br]that the vaccine manufacturers

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will profit too much [br]from a vaccine --

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that they will price gouge.

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The economist is worried [br]that the vaccine manufacturers

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aren't profiting enough.

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

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The Nobel Prize-winning economist [br]William Nordhaus has estimated

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that innovators -- they only receive [br]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[br]to try to alleviate this problem.

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We subsidize basic research [br]in universities,

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and we offer firms patents, [br]for example.

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

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It's too late to subsidize [br]the basic research.

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And a patent is exactly [br]the wrong idea.

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A patent raises the price [br]above the competitive price,

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but we know the competitive price[br]is already too high.

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For a good with a positive externality [br]like a vaccination,

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we want the price to be [br]below the competitive price.

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So a patent creates [br]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 [br]of the vaccine companies,

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say, because of politics, [br]we can cut their costs.

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

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Susan Athey, [br]Chris Snyder, and myself,

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working with a team of economists

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at accelerating [br]health technologies --

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why we have proposed [br]paying vaccine manufacturers

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part of their costs.

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Now, unfortunately, [br]most vaccines fail,

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so, typically,[br]a vaccine manufacturer --

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they won't take the risk

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of getting a vaccine factory[br]up and running

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until after a vaccine has been [br]proven safe and effective.

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But if we follow the typical route,

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we might end up [br]with an approved vaccine

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and not enough capacity

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to get millions of shots[br]in arms for months.

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So what we want to do

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is pay firms to build[br]at risk capacity now.

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It's expensive to build [br]a factory for a vaccine

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that may never be approved.

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

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the moment that one [br]is proven safe and effective.

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

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thousands of lives [br]and billions of dollars of GDP.

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So speeding a safe [br]and effective vaccine

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is extremely valuable[br]and worth investing in.

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Okay, so there you have it:

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externalities, incentives,[br]innovation policy,

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using market design to improve [br]social outcomes --

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these are key principles[br]of economics,

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

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

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our classroom activity [br]that incorporates this video.

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

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by taking a few quick [br]practice questions.

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To learn more about[br]externalities, click here.

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