The Economics of Vaccines

The first inoculation came in response to smallpox, a disease treated through the injection of pus from the meeker cowpox. Like any scientific innovation, it was met with backlash. Some found the cow imagery hard to swallow, others thought it was ungodly. Whatever the reason, opposition to vaccines has existed since the day of discovery. Even today, despite the significant advancement in science and vaccines themselves, a significant proportion of the population continues to skirt inoculation. This is an issue of course. After all, not taking vaccines ensures that the person puts themselves at greater risk should they get the disease. It could be compared to jumping off an aeroplane without a parachute: generally, not a condoned practice. Yet that would be a false analogy. If someone chose to jump to their death, the largest cost would be to themselves. Yet when people refuse vaccination, they are hurting not only their own health but also the health of those around them.

Vaccines have many benefits attached to them, these are sorted into the personal and social. The personal benefits of a vaccine may include not dying when you get a disease such as Covid-19, not having to take the day off when you get the flu or not losing your legs if you get Polio. There are more benefits associated with each of these primary benefits, not missing work may come with a potential promotion, having legs comes with the joys of swimming whereas not dying...leads to not dying. These are the benefits one may consider when one debates whether they want a vaccine. These very personal benefits are what the market price accounts for because it dictates the demand from each individual for the product. The equilibrium PQ below is largely dictated by the personal benefits of vaccines.

Yet vaccines also have significant social benefits, these are the positive effects to the rest of society on the basis of the consumption or production of a good. A prevalence of flu vaccine can increase the productivity of an economy as fewer workers take the day off or save a life. Economist Corey White estimated that 2 people getting flu vaccines saves one person from taking a sick day off whereas every 4000 vaccines save one person’s life. The prevalence of a vaccine for Covid-19 could save millions of lives and save countless people from having to sit in lockdown. It would ensure that consumer demand would be re-energised as herd immunity ensures people feel safer going out and spending their money, whilst ensuring that public health services aren’t pressured. Simultaneously it would save the worsening mental health and education gap that further lockdowns might cause. Furthermore, the prevalence of vaccines would mean that the government wouldn’t have to spend more money on furlough schemes or contact tracing, thus reducing its opportunity cost, allowing it to invest instead in education or prisons. Should these social benefits appear disproportionately large, it is because they are.

As can be seen in the graph above, the social marginal benefit is higher than the private marginal benefit. Under the assumption that the private marginal costs and the social marginal costs are the same, under a free market, which only accounts for private benefits we are bound to under consume vaccines. We would be consuming at Q, which is lower than the ideal consumption of Q*. This causes a deadweight welfare loss (economies in a standstill, shoddy prisons etc) as represented through the shaded area.

This is a market failure. When the holy free market doesn’t actually magically provide the best outcome. Understanding why this happens is important to find a solution. The presumed private benefits of a vaccine can be estimated through people’s willingness to pay for vaccines. A study done by the institute of labour in four countries amidst the first wave of Covid-19 found that adjusted on the basis of purchasing power parity, the average that any given individual would have been willing to pay for a vaccine was 100-200 dollars. This is obviously lower than the social benefits of vaccines. Yet interestingly, the researchers found variation between their samples on the basis of various metrics. For example, those that had personal experience with Covid-19 were willing to pay a higher price, as were younger and more affluent people. An obvious solution would be to infect everyone with Covid. That of course would be counterproductive. The researchers also found a more useful correlation however, those that had a higher trust in the government, in their healthcare and in the world health organisation, were willing to pay more for their vaccines, thus are more likely to value and sign up for them. This is highly actionable as it indicates that the issue is a lack of trust and information is an aspect that is leading to underconsumption.

The first potential solution thus is to provide information about vaccines to the public and to rebuild the trust with not only the government but also the health service. This solution would be implemented through the government providing this information itself through advertising campaigns that utilise online ads and other forms of easily accessible information campaigns (ie. Billboards). If as we have established that it is imperfect information that is keeping us away from Q* then it is the government’s responsibility to plug that gap. In addition to that, these ads can utilise behavioural economics to provide ‘nudges’ for people to act. Such as using emotive imagery (such as the people behind ventilators, staring out the screen) or they could use loss aversion (every flu vaccine you don’t take is a day of work lost). It is a good solution as it doesn’t force anyone to do anything and thus avoids the pitfalls of the Hayekian road to serfdom. At the same time as can be seen from the graph below it’ll increase demand for vaccines, from D to D1, thus shifting quantity Q to Q1 and bringing us closer to ideal Q*. This leads to us having the benefits of the increased positive externalities.

However, there are several issues with this approach. The primary reason is the money involved in running such expensive campaigns and the opportunity costs that come with it. Every extra pound that the government spends on an information campaign on the Covid-19 vaccine, for example, is a pound that could have gone towards helping the NHS. This is especially costly when considering we don’t really know if such campaigns ever have any effect. It can also backfire, should the government not choose its words and images wisely, it can end up angering people rather than making them informed. For example, the government advertisement to stay at home portrayed women taking on all household tasks whereas men were relaxed or working. Additionally, if the information is not entirely accurate then it would create government failure and the trust in the government would reduce even further. This could actually worsen vaccine uptake. Finally, there is a huge time lag between when information is released and when it starts impacting people’s behaviour. This luxury of time isn’t always available when it comes to things like vaccines, because each month's delay leads to more lives being lost.

Perhaps then we would appreciate an alternative solution, one that would ensure a more uniform approach: regulation. Vaccines could be made mandatory by the government and by individual employers. This is a theory that relies on command and control, where the government tells us how much of a good we must consume or produce. Obviously, in the case of vaccines, the government could mandate 100% compliance by fining anyone who doesn’t take up the vaccine or banning them from public places such as cafes and concerts or even stop them from going to work by ensuring an employer mandate. This technique would be good because it would also utilise the behavioural economic notion of loss aversion, as not taking the vaccine means people would be losing money or enjoyment and thus their compliance would be potentially high. This kind of policy would also give the government revenue from any fines collected, that the government could utilise in investment in education or healthcare. It may also influence social norms, as laws set moral standards and a law mandating vaccines would mean anti-vaxxers would find their position to be socially untenable. This is something we have already witnessed to a large part in mask mandates that makes mask avoidance a social taboo. This would also be extremely easy and speedy, two things imperative when a disease such as Covid-19 is spreading.

However, as with everything else, there are significant downsides to implementing such a heavy-handed approach. Some people may decide that the benefits of breaking the rules outweigh the monetary fine that they have to pay. As many anti-vaxxers oppose vaccines on the principle of liberalism by sometimes co-opting the ‘My body my choice’ movement, this sort of authoritarian push may not have the intended effect. There is a strong Hayekian argument here that argues government intervention is a slippery slope, one day they mandate vaccines, and the next they open up a gulag for political opponents. Whether that argument is personally convincing or not, it will surely encourage people to find ways to subvert the fines and laws. Even now, with no strict mandate in place, the BBC found fake vaccine records for Covid-19 on sale online, thus showing that the people who are truly against vaccines are willing to go to great lengths to deceive the law. There is also a great cost associated with the enforcement and implementation of such a law, after all a law that isn’t enforced isn’t one that is always followed. There is thus an additional opportunity cost associated with this type of regulation. Finally, this whole argument assumes that the government knows just exactly what and how to approach such a situation. We assume the government knows the right amount of fine (or jail time even) that will really convince people to take up vaccines. However, it appears that it is more likely to alienate those exact people. It’ll make lawbreakers of them but will hardly change their behaviour unless they are strapped to a chair and made to take the vaccine. That is surely not a precedent we want to be setting.

A final solution- and one I can argue will be the most ideal route- is to offer incentives for vaccination to individuals. We need a large uptake of vaccines, something along the lines of 8 out of 10, to ensure that the social benefits are significant, and that we can achieve herd immunity. The aim here is to internalise the externality, in a similar manner a subsidy might, except it would go to the consumer rather than the producer, seeing that a lot of vaccines, such as the Covid-19 one, are offered for free to the consumer. Thus, a payment to the consumer, in the form of a cash pay-out or perhaps a superficial payment (in the form of not having to wear masks in public, for example) would ensure that the private benefit gained by an individual would increase. As can be seen in the graph below, the private marginal benefit has shifted from PMB to PMB1 thus bringing us closer to SMB and the ideal consumption of Q*. This is a good strategy because the increase in consumption is entirely voluntary and is caused by a person’s own judgement. The equation for many people against vaccines simply dictates that the benefits are not high enough to justify the risks that they presume. By adding to these benefits, the government can be sure to increase uptake.

Whilst some may argue that this sort of payment would inflict a huge cost on the government, it could be argued that any payment would be cheap compared to alternatives. For example, the furlough scheme in the UK cost over 60 billion pounds, whereas the shutdown of the entire UK economy is in itself worth billions more lost. This is of course not considering the lives lost, which are for all extents and purposes- priceless. Others may find paying people to get vaccinated to be morally dubious in some way, yet they would then be ignorant of all the other instances where people are incentivised to do something good. For example, when people are paid to donate blood. There would be no issue on who to give the subsidy to as the government's aim is to vaccinate everyone, there would be no quota of eligibility. Similarly, fraud and misappropriating of funds whilst possible, are a smaller concern because of the universal nature of vaccines and the government records that show who is vaccinated.

It is thus quite evident that the ideal strategy in addressing the positive externalities of immunisation and ensuring an increase in vaccine uptake is to incentivise people to take them up. It is the only solution that is bound to achieve palpable results without turning the government into emperor Palpatine.