9:59:59.000,9:59:59.000 ♪ [music] ♪ 9:59:59.000,9:59:59.000 - [Alex] Hi, everyone. 9:59:59.000,9:59:59.000 Today, I want to talk about [br]applying some of the principles 9:59:59.000,9:59:59.000 of economics, namely [br]externalities and incentives, 9:59:59.000,9:59:59.000 to understand COVID[br]and vaccine policy. 9:59:59.000,9:59:59.000 Let's begin with a simple flu shot. 9:59:59.000,9:59:59.000 A flu shot is a great example of [br]a good with a positive externality. 9:59:59.000,9:59:59.000 When I get a shot, [br]I benefit myself, 9:59:59.000,9:59:59.000 but I also benefit other people 9:59:59.000,9:59:59.000 because I'm less likely [br]to transmit the virus. 9:59:59.000,9:59:59.000 In fact, the economist [br]Corey White has estimated 9:59:59.000,9:59:59.000 that every two flu vaccinations[br]save someone else 9:59:59.000,9:59:59.000 from getting sick [br]and having to miss a day of work. 9:59:59.000,9:59:59.000 And every 4,000 vaccinations [br]saves a life. 9:59:59.000,9:59:59.000 That's an incredibly [br]cost-effective way of saving a life. 9:59:59.000,9:59:59.000 The problem is that even though[br]the social benefits are very high, 9:59:59.000,9:59:59.000 people are unlikely to weigh[br]the social benefits 9:59:59.000,9:59:59.000 as high as the benefits [br]to themselves. 9:59:59.000,9:59:59.000 So individuals are [br]under-incentivized to get a flu shot. 9:59:59.000,9:59:59.000 Now we deal with [br]the external benefits 9:59:59.000,9:59:59.000 of vaccinations [br]in a variety of ways. 9:59:59.000,9:59:59.000 In some cases, such as polio,[br]we require school children 9:59:59.000,9:59:59.000 to be vaccinated by law. 9:59:59.000,9:59:59.000 In other cases, we offer incentives. 9:59:59.000,9:59:59.000 We subsidize vaccines [br]to keep the price low. 9:59:59.000,9:59:59.000 It's not just government policy [br]by the way. 9:59:59.000,9:59:59.000 Some firms will offer [br]their workers free flu shots. 9:59:59.000,9:59:59.000 That's an interesting case [br]where the employer internalizes 9:59:59.000,9:59:59.000 some of the positive externalities [br]from vaccination. 9:59:59.000,9:59:59.000 COVID is especially fascinating[br]because we can actually see 9:59:59.000,9:59:59.000 the externalities in market prices. 9:59:59.000,9:59:59.000 Whenever one [br]of the vaccine companies 9:59:59.000,9:59:59.000 has even a little bit of good news,[br]say, from a clinical trial, 9:59:59.000,9:59:59.000 the entire stock market jumps up. 9:59:59.000,9:59:59.000 Airline stocks, for example, [br]they jump up 9:59:59.000,9:59:59.000 with every bit [br]of good vaccine news. 9:59:59.000,9:59:59.000 The airlines, in other words,[br]are capturing some of the benefits 9:59:59.000,9:59:59.000 produced by vaccine manufacturers. 9:59:59.000,9:59:59.000 And since the vaccine manufacturers[br]aren't capturing all of the gains 9:59:59.000,9:59:59.000 from producing vaccines, 9:59:59.000,9:59:59.000 the vaccine companies [br]are under-incentivized. 9:59:59.000,9:59:59.000 Now this is a case [br]where economics leads you 9:59:59.000,9:59:59.000 to a completely different conclusion[br]than the man in the street. 9:59:59.000,9:59:59.000 The man in the street is worried[br]that the vaccine manufacturers 9:59:59.000,9:59:59.000 will profit too much [br]from a vaccine -- 9:59:59.000,9:59:59.000 that they will price gouge. 9:59:59.000,9:59:59.000 The economist is worried [br]that the vaccine manufacturers 9:59:59.000,9:59:59.000 aren't profiting enough. 9:59:59.000,9:59:59.000 By the way, innovations in general[br]are under-incentivized. 9:59:59.000,9:59:59.000 The Nobel Prize-winning economist [br]William Nordhaus has estimated 9:59:59.000,9:59:59.000 that innovators they only receive [br]about 2 to 2.5% of the value 9:59:59.000,9:59:59.000 of their innovations. 9:59:59.000,9:59:59.000 Now we do have some institutions[br]to try to alleviate this problem. 9:59:59.000,9:59:59.000 We subsidize basic research [br]in universities, 9:59:59.000,9:59:59.000 and we offer firms patents, [br]for example. 9:59:59.000,9:59:59.000 But neither of these solutions [br]is going to work well for COVID. 9:59:59.000,9:59:59.000 It's too late to subsidize [br]the basic research. 9:59:59.000,9:59:59.000 And a patent is exactly [br]the wrong idea. 9:59:59.000,9:59:59.000 A patent raises the price above [br]the competitive price, 9:59:59.000,9:59:59.000 but we know the competitive price[br]is already too high. 9:59:59.000,9:59:59.000 For a good with a positive externality [br]like a vaccination, 9:59:59.000,9:59:59.000 we want the price to be below [br]the competitive price. 9:59:59.000,9:59:59.000 So a patent creates [br]severe misallocation of resources. 9:59:59.000,9:59:59.000 So what do we do? 9:59:59.000,9:59:59.000 If we can't increase the profits [br]of the vaccine companies, 9:59:59.000,9:59:59.000 say because of politics, [br]we can cut their costs. 9:59:59.000,9:59:59.000 That's one reason why [br]Nobel Prize winner Michael_Kremer, 9:59:59.000,9:59:59.000 Susan Athey, Chris Snyder, [br]and myself, 9:59:59.000,9:59:59.000 working with a team of economists 9:59:59.000,9:59:59.000 at accelerating [br]health technologies -- 9:59:59.000,9:59:59.000 why we have proposed [br]paying vaccine manufacturers 9:59:59.000,9:59:59.000 part of their costs. 9:59:59.000,9:59:59.000 Now, unfortunately, [br]most vaccines fail so, typically, 9:59:59.000,9:59:59.000 a vaccine manufacturer --[br]they won't take the risk 9:59:59.000,9:59:59.000 of getting a vaccine factory[br]up and running until 9:59:59.000,9:59:59.000 after a vaccine has been [br]proven safe and effective. 9:59:59.000,9:59:59.000 But if we follow the typical route, 9:59:59.000,9:59:59.000 we might end up [br]with an approved vaccine 9:59:59.000,9:59:59.000 and not enough capacity to get [br]millions of shots in arms for months. 9:59:59.000,9:59:59.000 So what we want to do is pay firms[br]to build at risk capacity now. 9:59:59.000,9:59:59.000 It's expensive to build [br]a factory for a vaccine 9:59:59.000,9:59:59.000 that may never be approved. 9:59:59.000,9:59:59.000 But it's even more expensive[br]not to have a vaccine available. 9:59:59.000,9:59:59.000 The moment that one [br]is proven safe and effective 9:59:59.000,9:59:59.000 in the U.S. alone, every month [br]without a vaccine is costing 9:59:59.000,9:59:59.000 thousands of lives [br]and billions of dollars of GDP 9:59:59.000,9:59:59.000 so speeding a safe [br]and effective vaccine 9:59:59.000,9:59:59.000 is extremely valuable[br]and worth investing in. 9:59:59.000,9:59:59.000 Okay, so there you have it -- 9:59:59.000,9:59:59.000 externalities, incentives,[br]innovation policy, 9:59:59.000,9:59:59.000 using market design to improve [br]social outcomes. 9:59:59.000,9:59:59.000 These are key principles[br]of economics, 9:59:59.000,9:59:59.000 and they can help us [br]to improve policy in a pandemic. 9:59:59.000,9:59:59.000 - [Narrator] If you're a teacher,[br]you should check out 9:59:59.000,9:59:59.000 our classroom activity [br]that incorporates this video. 9:59:59.000,9:59:59.000 If you're a learner, make sure[br]this video sticks 9:59:59.000,9:59:59.000 by taking a few quick [br]practice questions. 9:59:59.000,9:59:59.000 To learn more [br]about externalities, click here. 9:59:59.000,9:59:59.000 ♪ [music] ♪