Answer to Question #157426 in Economics for Sabina Masca

Question

The coronavirus vaccines are coming too slowly, and the cost of waiting is enormous. Current production and procurement plans mean it will take up to two years before the world gets close to having enough doses for everyone. This may be optimal for manufacturers, but it is not for society. There needs to be a plan B.

The world needs 10bn doses of the BioNTech/Pfizer or the Moderna jabs, which are over 94 per cent effective, to give two shots to 5bn people, enough to curb the disease globally. But their targeted annual production in 2021 is about 2bn units, combined. The Chinese, Russian and Indian vaccines are hard to judge, given doubts about their efficacy and safety. Most countries’ hopes therefore rest on the Oxford/AstraZeneca jab, which is also relatively cheap and easy to distribute.

This joint venture plans to ramp up production to 3bn jabs through 2021. But so far they have only produced about 4m. Moreover, the vaccine’s two shots have an average efficacy of 70 per cent while problems with the trial design could delay US and EU approval.

Even if AstraZeneca’s production comes fully on stream, and other vaccines from companies such as Johnson & Johnson or Novavax are approved and produced, the world will lack sufficient doses for a long time. Yet every month in lockdown costs economies billions of dollars. It also increases the risk that more virulent strains emerge, as with the UK and South Africa variants. This danger will only subside when people everywhere are vaccinated.

Given the huge costs, the best economic policy would be to mobilise and co-ordinate global resources to ramp up vaccine production as fast as possible. Capacity needs to be expanded, subcontracting to more companies if needed or even setting up new factories. If we were really “at war” with the virus, governments would focus all their resources on this one task. Instead, there is a gulf between the rhetoric and reality of vaccine production.

There are good reasons to rely on commercial producers, so long as the incentives are right. But they are not. Vaccine manufacturers have little interest in expanding production massively. In fact, they would be financially worse off if they did. If they ramped up production capacity so that the whole world was supplied within six months, the newly built facilities would stand empty immediately afterwards. Profits would then be much lower compared with current scenarios, where existing plants produce at capacity for years to come.

In short, the current plan is suboptimal for society. This must change, because there is an overriding health and economic interest in rapid production expansion. Quicker vaccination would provide a public good that, in the jargon, is a valuable “externality” that private companies do not internalise.

There are two models to increase capacity more quickly. The first is for governments to give additional subsidies for production, or premiums for faster deliveries. That would enable producers to pay suppliers for the costs of speeding up their production, too. After all, they also have to work overtime to create new capacity. Clearly, this approach would be expensive. Yet it would be far cheaper than the ongoing cost of lockdowns.

Even so, there is no guarantee that companies would expand production to the social optimum. In the second model, governments would switch to a “Covid war economy” and order mass production. Compensation payments to companies whose patents have been used could be sorted out later, when the virus has been defeated.

Here, too, there are risks. For one, it is unclear how efficiently governments would manage such complex production tasks. Also, what about the next pandemic when it eventually comes? There is no doubt researchers would race to develop new vaccines. Whether financiers would fund them is another matter. It would depend on the final settlement reached between governments and companies this time.

A mix of carrots and sticks may be needed. Financial incentives (subsidies) to expand production could come first. These could be followed by direct interventions, such as government patent use or forced licensing of production, if the financial incentives by themselves are not enough.

Either way, the cost of suboptimal vaccine production cannot be justified from either a public health or an economic point of view. Sooner or later, the political cost will also become unacceptable. There is an urgent need for a plan B to produce sufficient vaccines quickly so as to protect us all.

4. Examine the evidence in the article that suggests the vaccine supply price elasticity is lower than would be ideal. (10)

Answer 1

The evidence in the article suggests that the vaccine supply price elasticity is lower than would be ideal, as a result the significant increase in suplly is not possible without sharp increase in prices to set up new production capacities.