To pay or be paid?

Can we use prices to help with vaccine distribution?

Welcome to Plugging the Gap (my email newsletter about Covid-19 and its economics). In case you don’t know me, I’m an economist and professor at the University of Toronto. I have written lots of books including, most recently, on Covid-19. You can follow me on Twitter (@joshgans) or subscribe to this email newsletter here.

There are two problems that we face with respect to vaccine distribution:

  1. Demand is greater than supply and so vaccine doses need to be rationed; a situation that leads to various uncomfortable choices.

  2. Demand is too low due to some fraction of the population not wanting to take the vaccine at all and, thus, putting themselves and others (who can’t take the vaccine) at risk.

Now, given the limitation on supply, it would surely mean that problem 2 is really moot. But it is all in the timing. Problem 1 is a ‘now’ problem while problem 2 is a ‘then’ problem. It shouldn’t surprise you that for each of these problems, economists have advocated using prices. Interestingly, for one problem, they want people to pay for a vaccine dose while, for the other, they want to pay people to take the vaccine. Suffice it to say, this is an unusual situation indeed.

The case for paying

The case for asking people to pay for a vaccine dose is very standard fare. One of the reasons Problem 1 exists is because vaccines are being distributed for free. A free good makes sense when the goal is for everyone to consume the good so this isn’t a fault in the policy but a short-term consequence of it. That said, there are some people who have their own private reasons for wanting to be vaccinated early. Thus, to use a price is to get people to signal those private reasons and then distribute the vaccine on that basis. John Cochrane makes that case:

Absolutely nobody has mentioned in public the free market answer: Sell to the highest bidder. 

(Or just allow some sales to the highest bidder. Don't put people in jail for selling some to the highest bidder,) 

It's not as dumb as it sounds. Sure, there is an externality. A good vaccine policy might be to give it to those most likely to spread it to others, with the goal of swiftly reducing the prevalence of the disease. That argues for giving the vaccine in bars. 

That is not our public policy. The entire discussion centers around who should be protected first, from a disease whose prevalence is taken as given. Old people, nursing homes, health care workers, essential workers -- the argument is not the externality. The argument is entirely who should get the individual benefit of protection from the vaccine.  Just why "to the highest bidder" is wrong is then much less clear. 

The case is stronger than usual, for there is a second way to avoid infection: Stay home. Social distance. Wear protective gear. So the question is not, really, "Who should be protected from the virus?" The question is, really, "Who should get a treatment that allows them to be out and about, risking contact with the virus, rather than protect themselves by traditional means?" It is really mainly an economic benefit, avoidance of the cost of other measures to stay healthy. There is an economic answer: people should be out and about first who generate the most economic benefit from being out. And, therefore, are willing to pay the most to get the vaccine. 

He also sees this a way of raising taxes to pay for vaccines more efficiently by effectively taxing the rich more (although he couches it in incentives for vaccine developers but that is beside the point). (There’s even a paper now showing what such an auction might look like).

Now Cochrane is wrong that no one has suggested this. I did back in April in what became part of my Economics in the Age of Covid-19 book and later became a whole chapter. But I knew that this was not going to fly politically.

Instead, I proposed that we can have our cake and eat it too. We can allocate vaccines according to some other criteria and then allow people to sell their dose to others who happen to be lower down in the queue. That way you get some market signals in the vaccine distribution but you not only aren’t favouring the rich explicitly but giving everyone an equal chance to earn a return on what is a very private good (your place in the line). If you wanted to go further you could allocate the whole thing on the basis of income/wealth (from lowest to highest) and then provide efficiency, market signals and an incredible boost to those who might need the money given the current recession which, unlike all past ones, actually favoured the rich!

At the very least, as I suggested last week, some swapping of your place in line should be allowed. (Steve Landsberg thinks similarly).

Nonetheless, what is true is that having a market makes people squeamish. But there are other ways of having people ‘pay for priority.’ Jonathan Gruber and Rena Conti suggest that people pay with their data.

We cannot rely on the traditional US system of assessing therapeutic benefit and harm post-launch. When new medicines are launched, the government  tasks innovator companies with monitoring the rollout. These data collection efforts are not enforced rigorously and it will be difficult for individual vaccine manufacturers to maintain rigorous evaluation standards post-launch. 

 Given these concerns,   information collected on the use of these vaccines and their impact on people's health and behavior  must be better. In order to go back to our lives, COVID-19 vaccines will have to be used by hundreds of millions of individuals, young and old, healthy and sick, white and Black, rich and poor, citizens and undocumented, free and incarcerated. The US should act boldly to instill public confidence and set up a centralized population data collection effort that collects all the necessary data to assess vaccine effectiveness while being voluntary, compensated, and even exciting. 

We propose that when individuals receive a COVID-19 vaccine, they will be offered the opportunity to participate in the COVID vaccine data lottery. 

Those who agree to participate will be entered into a lottery from which a large number of patients will be randomly selected each month, while ensuring sufficient coverage by age, race, and other important characteristics. Winners will immediately be rewarded, and then will be rewarded each week for completing a short web-enabled survey that reports the presence or absence of COVID-19 symptoms,any confirmation of COVID-19 infection, other aspects of health which may indicate vaccine side effects, and related behaviors that indicate success such as in person social engagement. 

In addition, once per quarter participating individuals should be given access to a free at-home antibody test which would be used to assess their protection against the virus. When new vaccines become available, their use should be added to these efforts.

This interesting. We need more study regarding the vaccines. But to do those studies we need people to make some sacrifices — in providing testing data and other things. So let’s offer people earlier places if they participate in those studies. Indeed, I think this should have been done to those who received a placebo in the Phase 3 trials. But this gives them and others another shot (pun not intended).

The case for being paid

Let’s now move to Problem 2 — not enough demand. Why? Here’s Greg Mankiw:

As all economics students learn, when an activity has a side effect on bystanders, that effect is called an externality. In the presence of externalities, the famous theorems of economics that justify laissez-faire do not apply. Adam Smith’s vaunted invisible hand can no longer work its magic.

A classic example of a negative externality is pollution, and the simplest and least invasive policy solution is a tax on emissions. In economics-speak, such a tax internalizes the externality: It induces polluters to take the cost of pollution into account by giving them a financial incentive to cut emissions. That’s why I have written here many times that a tax on carbon emissions is the best way to deal with global climate change.

Vaccination confers a positive externality. When you get vaccinated, you benefit not only yourself but also your fellow citizens by helping society take a step toward herd immunity. 

To deal with a positive externality, you need a subsidy. And Bob Litan proposed just that in August. He wants to pay every American $1,000 if they get the vaccine. It does matter, he says, what the source of the reluctance to be vaccinated is — from being anti-vaxxer to wanting to wait and see if it is safe or to just free ride on the fact that others will be vaccinated.

The “adult” version of the doctor handing out candy to children, fortunately, points toward a solution: pay people who get the shot (or shots, since more than one may be required).

How much? I know of no hard science that can answer that question, but my strong hunch is that anything less than $1,000 per person won’t do the trick. At that level, a family of four would get $4,000 (ideally not subject to income tax) – a lot of money to a lot of families in these difficult times, and thus enough to assure that the country crosses the 80 percent vaccination threshold.

Litan is correct in thinking that to close the demand gap payment can help. Indeed, for the case of vaccines, a Swathmore study showed that $30 per person could increase vaccine take-up rates by 12%. That suggests $1,000 might be too much. But that isn’t really an issue here. Remember, the vaccines are already free in the hope of them being allocated. Giving everyone $1,000 is just another way of redistributing income from the rich to the poor and will not lead to too many people being vaccinated. The greater risk is that the payment is too low so Litan errs on the positive side. In the end, it conveniently lines up with the kind of stimulus payments people are talking about to get the economy going after all of this so there is a sense this is sensibly piggybacking on something that will happen anyway.

That said, I do worry that the reason why people are not getting vaccinated will matter. If is simply inconvenience, not liking needles, or being responsible to come back for a second dose, then a payment does the trick. If you want to wait and see, then a payment is not going to matter as some people will want the vaccine earlier. But if you fear all vaccines because of mistrust, will a payment allay those fears? The Swathmore study doesn’t really hit on that. The risk is that if a payment of a reasonable size is offered, it may cause more people to fear it than currently do. I have no idea if this will be the case but I don’t really understand the fear side of this whole issue either and neither do most proposing these policies.

Putting it together

All of this leaves us with something of a conundrum. There are reasons for people to pay for priority in getting the vaccine and also reasons to pay people to get the vaccine. Of course, this suggests that the payment for the vaccine should go from positive to negative to balance these forces out. At the very least, the payment could kick in a few months later, and thus, people might opt to wait for it — fear or no fear — and this will create some of the price signals for priority. But playing these games with prices is notoriously difficult.

I have to admit that, for the most part, I am on the side of simplicity here. I think it probably won’t help to tie payments to getting a vaccine and that if someone is not vaccinated then the usual issues of denying them certain options will be the most effective — that plus good information provided by public health authorities.

That said, we are doing to have a mess as we distribute the vaccine. A few market-like deviations from a ‘fair’ ranking of priority will likely provide a pressure valve that will take the edge off the greatest inefficiencies caused by that ranking.

What did I miss?