Externalities and Incentives: The Economics of COVID
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0:02 - 0:04♪ [music] ♪
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0:13 - 0:14- [Alex] Hi, everyone.
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0:14 - 0:16Today, I want to talk about applying
-
0:16 - 0:18some of the principles
of economics, -
0:18 - 0:21namely externalities
and incentives, -
0:21 - 0:24to understand COVID
and vaccine policy. -
0:24 - 0:26Let's begin with a simple flu shot.
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0:26 - 0:31A flu shot is a great example of
a good with a positive externality. -
0:32 - 0:35When I get a shot,
I benefit myself, -
0:35 - 0:37but I also benefit other people
-
0:38 - 0:41because I'm less likely
to transmit the virus. -
0:42 - 0:45In fact, the economist
Corey White has estimated -
0:45 - 0:49that every two flu vaccinations
saves someone else -
0:49 - 0:52from getting sick
and having to miss a day of work. -
0:52 - 0:56And every 4,000 vaccinations
saves a life. -
0:56 - 0:59That's an incredibly
cost-effective way of saving a life. -
0:59 - 1:04The problem is that even though
the social benefits are very high, -
1:04 - 1:08people are unlikely to weigh
the social benefits -
1:08 - 1:10as high as the benefits
to themselves. -
1:11 - 1:15So individuals are
under-incentivized to get a flu shot. -
1:16 - 1:17Now, we deal with
the external benefits -
1:17 - 1:21of vaccinations
in a variety of ways. -
1:21 - 1:25In some cases, such as polio,
we require school children -
1:25 - 1:28to be vaccinated by law.
-
1:28 - 1:30In other cases, we offer incentives.
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1:30 - 1:33We subsidize vaccines
to keep the price low. -
1:33 - 1:36It's not just government policy,
by the way. -
1:36 - 1:40Some firms will offer
their workers free flu shots. -
1:40 - 1:44That's an interesting case
where the employer internalizes -
1:44 - 1:47some of the positive externalities
from vaccination. -
1:48 - 1:50COVID is especially fascinating
-
1:50 - 1:54because we can actually see
the externalities in market prices. -
1:55 - 1:57Whenever one
of the vaccine companies -
1:57 - 2:01has even a little bit of good news,
say, from a clinical trial, -
2:01 - 2:04the entire stock market jumps up.
-
2:04 - 2:06Airline stocks, for example --
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2:06 - 2:10they jump up with every bit
of good vaccine news. -
2:10 - 2:15The airlines, in other words,
are capturing some of the benefits -
2:15 - 2:18produced by vaccine manufacturers.
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2:18 - 2:22And since the vaccine manufacturers
aren't capturing all of the gains -
2:22 - 2:24from producing vaccines,
-
2:24 - 2:27the vaccine companies
are under-incentivized. -
2:28 - 2:31Now this is a case
where economics leads you -
2:31 - 2:35to a completely different conclusion
than the man in the street. -
2:35 - 2:38The man in the street is worried
that the vaccine manufacturers -
2:38 - 2:41will profit too much
from a vaccine -- -
2:41 - 2:43that they will price gouge.
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2:43 - 2:47The economist is worried
that the vaccine manufacturers -
2:47 - 2:49aren't profiting enough.
-
2:49 - 2:54By the way, innovations, in general,
are under-incentivized. -
2:54 - 2:57The Nobel Prize-winning economist
William Nordhaus has estimated -
2:57 - 3:02that innovators -- they only receive
about 2 to 2.5% of the value -
3:02 - 3:03of their innovations.
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3:03 - 3:08Now, we do have some institutions
to try to alleviate this problem. -
3:09 - 3:12We subsidize basic research
in universities, -
3:12 - 3:14and we offer firms patents,
for example. -
3:14 - 3:19But neither of these solutions
is going to work well for COVID. -
3:19 - 3:23It's too late to subsidize
the basic research. -
3:23 - 3:26And a patent is exactly
the wrong idea. -
3:26 - 3:31A patent raises the price
above the competitive price, -
3:31 - 3:35but we know the competitive price
is already too high. -
3:35 - 3:38For a good with a positive externality
like a vaccination, -
3:38 - 3:42we want the price to be
below the competitive price. -
3:42 - 3:47So a patent creates
a severe misallocation of resources. -
3:47 - 3:49So what do we do?
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3:49 - 3:52If we can't increase the profits
of the vaccine companies, -
3:52 - 3:56say, because of politics,
we can cut their costs. -
3:57 - 4:00That's one reason why
Nobel Prize winner Michael Kremer, -
4:00 - 4:03Susan Athey, Chris Snyder,
and myself, -
4:03 - 4:05working with a team of economists
-
4:05 - 4:08at accelerating
health technologies -- -
4:08 - 4:11why we have proposed
paying vaccine manufacturers -
4:11 - 4:13part of their costs.
-
4:13 - 4:19Now, unfortunately,
most vaccines fail, -
4:19 - 4:22so, typically,
a vaccine manufacturer -- -
4:22 - 4:25they won't take the risk
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4:25 - 4:29of getting a vaccine factory
up and running -
4:29 - 4:33until after a vaccine has been
proven safe and effective. -
4:33 - 4:35But if we follow the typical route,
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4:35 - 4:39we might end up
with an approved vaccine -
4:39 - 4:44and not enough capacity to get
millions of shots in arms for months. -
4:45 - 4:51So what we want to do is pay firms
to build at risk capacity now. -
4:51 - 4:54It's expensive to build
a factory for a vaccine -
4:54 - 4:57that may never be approved.
-
4:57 - 5:01But it's even more expensive
not to have a vaccine available -
5:01 - 5:04the moment that one
is proven safe and effective. -
5:04 - 5:08In the U.S. alone, every month
without a vaccine is costing -
5:08 - 5:12thousands of lives
and billions of dollars of GDP. -
5:12 - 5:16So speeding a safe
and effective vaccine -
5:16 - 5:20is extremely valuable
and worth investing in. -
5:20 - 5:22Okay, so there you have it:
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5:22 - 5:26externalities, incentives,
innovation policy, -
5:26 - 5:32using market design to improve
social outcomes -- -
5:32 - 5:34these are key principles
of economics, -
5:34 - 5:39and they can help us
to improve policy in a pandemic. -
5:41 - 5:43- [Narrator] If you're a teacher,
you should check out -
5:43 - 5:45our classroom activity
that incorporates this video. -
5:46 - 5:48If you're a learner, make sure
this video sticks -
5:48 - 5:50by taking a few quick
practice questions. -
5:50 - 5:53To learn more
about externalities, click here. -
5:54 - 5:56♪ [music] ♪
- Title:
- Externalities and Incentives: The Economics of COVID
- Description:
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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 - Video Language:
- English
- Team:
- Marginal Revolution University
- Project:
- Micro
- Duration:
- 05:58
Theresa Ranft edited English subtitles for Externalities and Incentives: The Economics of COVID | ||
Theresa Ranft edited English subtitles for Externalities and Incentives: The Economics of COVID | ||
Theresa Ranft edited English subtitles for Externalities and Incentives: The Economics of COVID | ||
Kirstin Cosper edited English subtitles for Externalities and Incentives: The Economics of COVID | ||
Kirstin Cosper edited English subtitles for Externalities and Incentives: The Economics of COVID | ||
Kirstin Cosper edited English subtitles for Externalities and Incentives: The Economics of COVID | ||
Kirstin Cosper edited English subtitles for Externalities and Incentives: The Economics of COVID | ||
Kirstin Cosper edited English subtitles for Externalities and Incentives: The Economics of COVID |