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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,
but we know the competitive price is already too high.
For a good with a positive externality like a vaccination,
we want the price to be below the competitive price.
So a patent creates severe misallocation of resources.