Is a vaccine a public good?

Prabhudesai asked: Is a vaccine a “public good”?

In economics, goods that are non-rival (consumption of the good by someone does not decrease the amount available for others to consume) and non-excludable (no one can be prevented from consuming) are called pure public goods. By that definition, clearly a vaccine is not a pure public good.

A good that is non-rival but excludable is called a “club good” — a large park in a gated community, for example. A good that is rival but non-excludable is called “common pool” — a pasture for grazing cattle with no fences, for example. 

So what is a vaccine? It is a private good because it is both excludable and rival. But it does have positive externalities. A person who gets the vaccine gets protection from the virus, of course, but he also confers some benefits to others because of his immunity.

The usual recommendation is that activities that have positive externalities should be subsidized. Suppose the vaccine costs $10 and confers $3 of positive externalities, then that externality should be ‘internalized’  with a subsidy of $3 so that the person who gets vaccinated pays only $7 for the vaccine.

In this story, we have not said anything about the benefits of the vaccine itself. If you suppose the benefit of the $10 vaccine to a person is $50,000, then of course it doesn’t matter that there is a $3 positive externality — all who can afford the $10 should not have to be subsidized to get the vaccine.

So what should the policy be for those who cannot afford the $10, such as would be the case for extremely poor people? One simple way would be to subsidize the vaccine for such people and vaccinate them for free.

You could of course use general tax revenues to provide the subsidy. But there’s an alternative: cross-subsidy. You price-discriminate to raise the revenues required for the subsidy. Charge high prices to the rich and lower prices for the poor.

Now to the matter of the government putting a price ceiling on the vaccine. That is — how shall I put it most delicately — the stupidest, ignorant, asinine, retarded, heads-up-the-effing-ass policy that can be imagined under the circumstances. No one with basic common sense would ever recommend that policy. It shows that the bureaucrats in the Indian government are incredibly stupid. (Of course the politicians are generally bottom-feeding lowlifes, and they cannot be expected to have basic common sense.)

The fundamental fact is that price ceilings lower the supply. If you want a shortage of something, the simplest thing you have to do is to prevent the market from functioning. Supply increases with the market price: the higher the price that suppliers get in the market, the more they are able and willing to supply to the market.

If the government sets the price ceiling to INR 150, and that price is lower than the full cost of production, the vaccine supply will dry up. Full cost of production has to be covered. That includes the cost of development and the risk of failure — which are sunk costs. 

So if the R&D cost is say $100 million and the chance of failure is 50%, then you have appropriately inflate the returns required to induce firms to invest in the development of the vaccine. In this case, you’d say that the R&D cost is $200 million, and that if the total number of doses of the vaccine is 200 million, and the marginal cost of each dose is $2, then the full cost of production is $3 per dose. Now if you add a reasonable profit of $x, and you get a selling price of $3+x.

The government can of course force the price below that reasonable price. After all, the R&D cost is sunk and by definition cannot be recovered. But it does send a signal to the market: that the government can and does misappropriate your investment and therefore it is a bad idea to invest under such a government.

The fact is that the idiots (the aforementioned stupid babus and netas) don’t suffer from their idiocy since they are rich and can buy whatever they need abroad. It’s the people those idiots rule over who suffer. The puzzle is of course why do they suffer in silence. Shouldn’t they at least make those responsible for the suffering feel a bit of the pain? 

Prabhudesai then asked: What would be a good policy advice an economist should give to Indian government to ensure Indians have enough vaccines to avoid further lockdowns ?

My policy recommendation would be: 

  1. Remove all price controls on vaccines.
  2. For those who cannot afford the vaccine at the free market price, the government should subsidize them. Mechanisms can be easily designed for cross-subsidizing the poor.

The free market price would evolve from the interaction of demand and supply. The free market will also evolve various mechanisms for delivering vaccines efficiently because suppliers are motivated to make and sell vaccines to recover their investment and make a profit.

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