The Economic Case for a People's Vaccine
Ensuring a COVID-19 vaccine is available to all makes both moral and economic sense.
September 15, 2020
Sep 15, 2020
15 Min read time
Ensuring a COVID-19 vaccine is available to all makes both moral and economic sense.
Many have called for a people’s vaccine for COVID-19—a vaccine provided universally and accessibly to the entire world population. The moral arguments may be familiar, but economics supports the case, too. Economics also helps to explain what role the public sector should play in developing a people’s vaccine and how such efforts should be coordinated across countries.
We have reason to value the health of others, both as an important moral end in itself and as a contribution to a productive and well-functioning society.
Drawing on economic and moral arguments, we make the case in two steps. First we consider how a vaccine should optimally be distributed, once it has been developed. We argue that even if a vaccine were like any other consumer good—generating purely private benefits—the economic case for a people’s vaccine would be strong. But a vaccine differs from other consumer goods because of the special nature of health, which gives reason for us to value other people having it, even if there are no other spillovers involved. Moreover, a vaccine is not like just any other consumer good: its benefits extend far beyond the individual vaccinated. This externality strengthens the case for a people’s vaccine. Together, these considerations justify pricing a vaccine at an accessible cost. We argue that such a scheme is feasible even without any direct government intervention so long as the formula for the vaccine is made freely available. (After all, generic manufacturers currently compete to provide drugs using known formulas at low costs worldwide.)
A common objection to this type of reasoning is that a very low-cost pricing scheme may not provide sufficient incentive for companies to develop a vaccine in the first place, especially since its development may cost billions of dollars. If there is no vaccine to distribute, critics say, there will be none to offer cheaply. In the second step, we rebut this objection by considering whether there exists a policy framework that would both create a strong incentive for vaccine development and permit low cost distribution. We show that the right public policies can reconcile the objectives of efficient drug development and efficient drug distribution. Many of the arguments we make apply in some measure to any medicine, but they apply with overwhelming force to a COVID-19 vaccine because of the sheer scale of the public benefits that are expected from making it universally accessible.
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Efficient and Equitable Pricing
Suppose that Willy Wonka spends billions of dollars and many years developing a unique and appealing new kind of gumball, which can be manufactured cheaply once developed. Standard economic theory tells us that the gumball price that maximizes societal gain is equal to the cost of the production of an additional gumball—the marginal cost. This price is efficient in the sense that if it were set any higher, some gumballs that could have been produced at a cost lower than the willingness to pay of consumers would not be consumed, leading to unnecessarily forgone pleasures. Economists refer to this forgone “consumer surplus” as “deadweight loss.”
Even if a vaccine were like any other consumer good, the economic case for a people’s vaccine would be strong. The special nature of health only strengthens the case.
What about covering all the costs that went into developing the gumball in the first place? Theory also tells us that these costs should be covered by transferring some of the surplus—the difference between the cost of producing a good and its benefit to consumers—to Wonka. This could be done, for instance, by charging a fee for membership in a “gumball club” that offers gumballs at their production cost. (The resulting pricing system is called a two-part tariff.) In order for the membership charge not to deter consumption and result in deadweight loss, it must not be set too high; on the other hand, it must also raise the amount needed for product development. It may not be possible to attain both of these goals without charging those who experience a greater surplus more for membership, and the task of identifying consumers by how much they enjoy the gumball will be very difficult. It may also be hard to prevent resale of gumballs to non-members. An alternative is for the government to pay the membership fee on behalf of all children. Although the government would have to raise the revenue for this intervention, perhaps through progressive taxes, it would also ensure that as many children as possible were able to enjoy the gumballs, ensuring an efficient level of production and consumption.
Why do we rarely see such pricing methods in practice? For one thing, it is difficult to design an incentive scheme to ensure that Wonka truthfully reveals his product development costs but also works assiduously to produce a better gumball. His costs and effort may be hard for an outsider to monitor, and if the government pays him whatever he asks, “costs” are likely to skyrocket. For another, it may not be possible to raise the tax revenue needed to pay for the scheme without administrative costs and harm to work effort or other incentives, so that social outcomes are not better overall. Instead, Wonka is typically allowed to charge whatever he wants for his gum balls, which may well be above the marginal cost of their production. This provides him with a reward for innovation and ensures that he can cover his costs. Still, economic theory provides clear guidance that if a low-cost “people’s gumball” could be offered, it would give rise to a more efficient solution, with more gumballs being consumed by more people.
How does the analysis change if Wonka’s gumballs confer benefits not just to the children who consume them but to others? Economists have long recognized that such “externalities” create a case for subsidies. Since individuals will not, left to themselves, pay for benefits that are received by others, they would consume less than the amount necessary to maximize societal benefit. This gives a reason for lowering the price of gumballs further in order to encourage a higher level of consumption.
The right public policies can reconcile the objectives of efficient drug development and efficient drug distribution.
A comparable situation applies to vaccines that protect against infectious diseases. Protecting any one individual protects others, too, and this adds to the case for subsidizing such vaccines, even making them free. The highly infectious and disruptive nature of COVID-19 therefore enhances the case for a universally accessible vaccine, although it does not depend on this feature of the disease. Even if a medical treatment had no “external” health benefits for others, as for example in the case of cancer, there would still be a compelling case for making it universally accessible because we have reason to value the health of others, both as an important moral end in itself and as a contribution to a productive and well-functioning society.
Health is different
Health is a good for society, above and beyond the satisfaction it provides to individuals, and this fact makes the case of a vaccine utterly unlike that of a gumball. It may be argued that justice demands societal measures to achieve basic health. This perspective further cements the case for making vaccines and essential medicines accessible to all. Accessible pricing of a vaccine is necessary to eliminate deadweight loss in a more profound sense than that usually employed by economists—avoiding death and sickness. A people’s vaccine for COVID-19 makes moral sense.
Manufacturing and Distributing the Vaccine
Although vaccine development costs are high, the marginal cost of making a unit of a vaccine is usually low. In order to minimize losses resulting from a lack of vaccination—not merely of the direct losses to individual welfare as a result of not undergoing vaccination but also social welfare losses due to the continued prevalence of the disease—a vaccine should be sold at or below the cost of its production. It should also be brought to market as soon as possible, on a scale sufficient to provide for the world’s entire population. The easiest way to achieve this is to make its formula freely available, so that any manufacturer in the world can produce it, thereby keeping costs down and maximizing output. Governments and philanthropic foundations are already making investments in increased vaccine production capacity, but this effort is less likely to be needed if the formula is made available to all willing manufacturers. Efficient and equitable pricing is likely to be easily achieved by eliminating the arbitrary barrier created by intellectual property. This approach to a people’s vaccine harnesses the power of private initiative and the market.
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Incentives to Develop the Vaccine
But would making the formula for a vaccine freely available discourage vaccine development in the first place? Conventionally, incentives for drug development are created by issuing patents—in effect, temporary monopolies—giving companies the privilege of charging what the market will bear, which is invariably a higher price than the marginal cost of producing the drug. As we have seen, this results in inefficiency: unnecessary deadweight losses to individuals and to society. In the case of COVID-19, lack of access to the vaccine is likely to be even more harmful than in the case of other disease, because of the massive disruptive effect on society of other measures to contain it.
Lack of access to a COVID-19 vaccine is likely to be even more harmful than in the case of other disease because of the massive disruptive effect on society of other measures to contain it.
Another solution is available. Consider two possibilities. The first, an “effort-based” approach, would pay the costs of organizations that put good-faith efforts into research and development. The second, an “outcome-based” approach, would reward organizations for success in meeting specific benchmarks, up to and including a full-fledged vaccine. (A famous example of the latter is the eighteenth-century British Longitude Act, which established rewards for developing methods for identifying the location of a ship at sea.) These have also been referred to as the push and pull approaches.
Both approaches are compatible with making a vaccine’s formula freely available to all producers. The effort-based approach enables firms to participate in research and development activities but does not provide “high-powered” incentives to work toward success. (How much such incentives really matter is a subject of debate. After all, some public research and development organizations that do not rely on financial incentives have a strong track record of success.) The outcome-based approach, by contrast, may create strong incentives but deters many from participating, because of the risks involved and the need for upfront financing. Moreover, since any one firm has only a certain chance of winning, this can dilute incentives, requiring that very large rewards be put up in order to make it worthwhile to compete. There is no perfect solution to this problem, but an intermediate method, which gives some weight to each is possible and desirable.
Outcome-based measures can be structured in various ways but it is likely that they would have to be organized as rewards for achieving specific components of a solution, which might be shared among those making demonstrable contributions, with the largest rewards going to those who have made the most important contributions first. Any outcome-based incentive must suffice to generate sizable efforts. The level of resources that must be offered to bring about adequate research and development incentives is nevertheless likely to be lower, for a vaccine with a large worldwide market, than that required to compensate firms for the monopoly profits that they would possess if they were to acquire patent rights.
The difference between the approach we propose here and what has become known as an “advance market commitment” (AMC) to purchase a vaccine—prominently advocated by some—is that an AMC avoids “expropriating” the intellectual property of firms which develop drugs, but we do not constrain the solution in this way. We require instead that it be understood from the outset that the products of such efforts must be made freely available. Whereas advocates of an AMC assume that the firms which develop a vaccine will also manufacture it, we see this as unnecessary. These two steps should be separated. Adequate incentives and support should be given directly for research and development to both private and public research establishments. Generic drugs manufacturers can then be relied upon to produce and distribute the drug.
Adequate support should be given directly for research and development to both private and public research establishments. Generic drugs manufacturers can then be relied upon to produce and distribute the drug.
Our proposal also differs from a “health impact fund” for the development of drugs for neglected diseases, which requires that participating firms develop and distribute drugs at low cost, but attracts them to participate by offering rewards greater than what they would attain if they were to act as conventional monopolists. Both an AMC and health impact funds seek to make drug development more profitable than it would otherwise be for private firms. In contrast, we seek to make drug development sufficiently profitable that it will take place. The distinction may not matter much for neglected diseases affecting mainly the poor, where the costs of drug development exceed potential monopoly revenues (that is why they are neglected by developers). But it matters a great deal for drugs that are needed by many more people, for which potential monopoly revenues may greatly exceed the costs of drug development. Moreover, whereas these other proposals may involve contracting with firms to keep costs low, depending on governments gaining knowledge of firms’ costs, our market-based proposal automatically leads to the lowest possible costs by giving free access to the formula to generic producers, who will then compete.
A COVID-19 vaccine is a global public good, from which the world’s entire population will benefit. As such, resources should be raised from a wide-range of potential beneficiaries and concentrated at the highest possible scale: the global level, to reduce unnecessary duplication of efforts and to make possible incentives that are as large as possible. The funds already raised for vaccine development through voluntary contributions by countries and donors are a good start to ensuring adequate financing and reward for research and development. These resources may not suffice, however, to ensure the actual delivery of any vaccine to the world population, if it is not modestly priced, and there is no guarantee that it will be, since firms that develop a vaccine are presently expected to retain the resulting intellectual property rights. Efforts remain fragmented, with many large countries pursuing their own approaches. The U.S. government has formed partnerships with specific private firms but not made a commitment to make any vaccine universally available. Worldwide, the World Health Organization’s Covax initiative has provided a framework for coordination between countries to support vaccine development and eventually to engage in joint procurement. It has also initiated an advance purchasing scheme applying to specific vaccines. But the initiative has so far raised only modest resources. It is far from obvious, therefore, that any vaccine that is developed will be accessible to all.
It is a myth that new products arise primarily from “competition” between firms in the market. In fact, both collaboration and competition are typically involved in research and development, both within and across organizations, whether private sector firms or public sector bodies.
Achieving a vaccine quickly depends on enabling researchers to build upon what has been done before and what is being done by others. An accelerated approach to developing a COVID-19 vaccine should therefore remove the role of intellectual property as an obstacle to research. It should be possible for all researchers to use any existing ideas and techniques freely in order to develop this solution in the interests of all humanity. This requires, at a minimum, the temporary suspension or compulsory licensing of all intellectual property rights that might be used in research and development projects. Information relevant to developing a vaccine must be freely shared across nations so that efforts can coalesce and cumulate. The interests of countries in this goal are fundamentally aligned, and the sharing of information and resources therefore benefits all. Proposals from the World Health Organization to create an “intellectual property pool” for COVID-19 research are in line with the approach that we suggest.
Barriers created by intellectual property rights act as a potential obstacle to both accelerated development and universal access.
Compulsory licensing or even outright suspension of intellectual property can help to accelerate vaccine development. Governments are already providing diverse incentives to private firms engaged in COVID-19 vaccine development. They are buying shares in firms, making advance purchase commitments, or otherwise supplying funds without challenging the idea of intellectual property itself. Some of the same firms have argued vigorously that such intellectual property rights are necessary to provide incentives for innovation. We have argued that this need not be the case generally. The arguments against business-as-usual protections of intellectual property rights are especially strong in light of the exceptional nature of the COVID-19 emergency, which demands both accelerated vaccine development and universal access to it. Barriers created by intellectual property rights act as a potential obstacle to both.
The resistance of some governments to demanding more of private sector firms may derive from the fear of establishing a precedent perceived to weaken private sector claims generally. As we have argued, a better system of drug development is possible, so a precedent that weakens such claims might be welcomed. But pragmatic accommodation of private sector interests may lead to a decision to limit intellectual property rights selectively and temporarily, as part of the emergency response to COVID-19. There is ample provision in national and international law for such an exceptional measure.
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While the principles we advance to develop and distribute a vaccine against COVID-19 can be applied to the development of other essential drugs, and indeed to other pressing social problems, the current challenge provides a stark demonstration of what is needed for research and development to serve the broader public interest. Failing to do what both sound economics and morality require may keep a life-saving product out of the hands of many of the world’s people, unnecessarily prolonging a global calamity.
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September 15, 2020
15 Min read time