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Externalities and Incentives: The Economics of COVID

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    ♪ [music] ♪
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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] ♪
Titolo:
Externalities and Incentives: The Economics of COVID
Descrizione:

How can understanding externalities and incentives help us better respond to COVID-19?

The benefits of vaccines extend beyond those receiving the shot (e.g. a "positive externality") and that means that vaccines are under-incentivized. There are a variety of institutions to try to correct this; during a pandemic, these institutions don’t work so well.

Every day without a COVID-19 vaccine means thousands of lives and billions of dollars lost. That means the positive externalities to the rapid development of a safe, effective vaccine are huge!

Alex Tabarrok dives into the positive externalities associated with vaccines and explains his research with Nobel Prize winner Michael Kremer, Susan Athey, and Chris Snyder on how to incentivize development of a vaccine for COVID-19.

***INSTRUCTOR RESOURCES***
This video’s classroom assignment: https://mru.io/mo0
Related COVID theme assignment on the incentives of ideas: https://mru.io/bqt
More high school teacher resources: https://mru.io/bf2
More professor resources: https://mru.io/77k
EconInbox: https://mru.io/evt
Try out our practice questions: https://mru.io/ckd

***MORE LEARNING***
More on externalities: https://mru.io/mu5
More on incentives: https://mru.io/zgl
Read more about Alex’s COVID proposal: https://www.nytimes.com/2020/05/04/opinion/coronavirus-vaccine.html

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Video Language:
English
Team:
Marginal Revolution University
Progetto:
Micro
Duration:
05:58

English subtitles

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