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- [Alex] Hi, everyone.

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

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of economics, namely [br]externalities 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]save 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,[br]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 [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[br]because we can actually see

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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, [br]they jump up

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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 above [br]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 below [br]the competitive price.

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So a patent creates [br]severe misallocation of resources.