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- [Alex] Hi, everyone.

Today, I want to talk about 
applying some of the principles

of economics, namely 
externalities and incentives,

to understand COVID
and vaccine policy.

Let's begin with a simple flu shot.

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

When I get a shot, 
I benefit myself,

but I also benefit other people

because I'm less likely 
to transmit the virus.

In fact, the economist 
Corey White has estimated

that every two flu vaccinations
save someone else

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

And every 4,000 vaccinations 
saves a life.

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

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

people are unlikely to weigh
the social benefits

as high as the benefits 
to themselves.

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

Now we deal with 
the external benefits

of vaccinations 
in a variety of ways.

In some cases, such as polio,
we require school children

to be vaccinated by law.

In other cases, we offer incentives.

We subsidize vaccines 
to keep the price low.

It's not just government policy 
by the way.

Some firms will offer 
their workers free flu shots.

That's an interesting case 
where the employer internalizes

some of the positive externalities 
from vaccination.

COVID is especially fascinating
because we can actually see

the externalities in market prices.

Whenever one 
of the vaccine companies

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

the entire stock market jumps up.

Airline stocks, for example, 
they jump up

with every bit 
of good vaccine news.

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

produced by vaccine manufacturers.

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

from producing vaccines,

the vaccine companies 
are under-incentivized.

Now this is a case 
where economics leads you

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

The man in the street is worried
that the vaccine manufacturers

will profit too much 
from a vaccine --

that they will price gouge.

The economist is worried 
that the vaccine manufacturers

aren't profiting enough.

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

The Nobel Prize-winning economist 
William Nordhaus has estimated

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

of their innovations.

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

We subsidize basic research 
in universities,

and we offer firms patents, 
for example.

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

It's too late to subsidize 
the basic research.

And a patent is exactly 
the wrong idea.

A patent raises the price above 
the competitive price