Public Goods/Positive externatilities, Vaccinations and the free rider problem
Prof. Wolaver, October 8, 2001

How many have had any economics?

Trouble getting the reading(Sachs...distributed in class)(but I guess the center for int’l development is not a high priority at Harvard)

If you had been able to access the readings, would have read about malaria, TB and HIV-
100% of malaria, 95% of new malaria and HIV infections in developing world)

Relative global Spending in 1998 on AIDS research and development for drugs and Vaccinations

2 billion on treatments 300 million on vaccination
6.67 times on treatment vs vaccinations

Public Goods Experiment:

You are each endowed with 3 pieces of candy. The total amount of contributions will be doubled, and then everyone gets an equal amount of the distribution for their group, plus the number of pieces of candy they kept personally.

So individual take:

If you give nothing and everyone else give all 3 pieces of candy:

Your share is:
What you keep + equal share of kitty

3 + 31*3*2/32 = 9
If you give all 3 pieces, but no one else give anything:
0 + 3*2/32 = approximately 1/5 of a piece candy (3 smarties)

Show how everyone better off if all contributed their whole endowment of candy to the group:
Max production of the “public good”

Results:

If everyone had given all 3 pieces of candy, total “economy” would’ve produced 270 pieces of candy.

(As an approximation) We had contributions of 58, resulting in 58*2 + original 90: roughly 206

Did everyone give all of their “endowment”? NO

Therefore: The market under-provided the public good

Those who enjoy the candy without contributing are “free riding”
Group project example: grade is a public good- you all get the same grade, and you can’t prevent the slackers from enjoying the high grade.
Public Goods & goods with positive externalities:

Public goods have two main characteristics

Non-excludable
You cannot prevent me from enjoying the good, even if they don’t pay for it

Some sort of “externality”
Your consumption affects me (or mine affects yours). If everyone around me is vaccinated, I will be protected, even if I’m not vaccinated.
Vaccinations could be considered either a private good with positive externalities or a public good:
difference between public goods and positive externalities is just the matter of degree in how much the good is consumed privately. In both cases, since there are social benefits to consumption, the market will not provide the optimal amount.
One aspect of vaccines are non-excludable
You’re being vaccinated helps me (externality part), and you can’t prevent me from enjoying the benefits (nonexcludable part).

When you hear economists talking about the efficiency of the market, what they are talking about is for goods if there are no externalities and if the good is excludableplus a lot of other assumptions about the markets. Adam Smith’s invisible had says that profit motive will produce the right amount of goods at the right prices to make the most amount of utility (“happiness”) possible:

•abassumptions are no monopolies of sellers, or buyers
•abperfect information
•abgoods are excludable and no externalities (private goods only)
•abpeople are rational and self-interested
Vaccines violate the private goods assumption.

One reason why the market for vaccines is so low, is that you are only willing to pay for the benefit to yourself, you are not willing to pay for the benefit your shot gives to society.

Therefore: some people would be willing and able to pay for vaccine, but many would not. Fewer are willing to pay than is socially optimal

In the case of market imperfections like public goods:
Economics says that therefore the government should fund.

Add to the public goods problem, for vaccines, ability to pay is a major factor in the places that need the vaccines the most-Sachs article concentrates on the low private market for vaccines, since AIDS is concentrated in poor countries that wouldn’t be able to pay much for any vaccine that becomes available
Add to that again from Sachs article that governments are only buyer and can negotiate for lower prices. (Have violated the many buyers and sellers assumption of perfect markets).

NOTE: HIV/AIDS vaccine will be different than the typical childhood vaccines in the U.S. Here: the government mandates that every child be vaccinated before entering school, creating a vast private market. For these vaccines, there are many buyers. For HIV/AIDS, the countries affected are so poor, and the people in them so poor, that the individuals would by and large not be able to purchase the vaccines on their own.
(Note: a lot of children do not receive the vaccinations at the appropriate times, and only get them right before they are entering school. Another example of the market under-providing the public good).

Certainly the governments of the countries most affected by AIDS (or the WHO or some other organization) would be the buyers, and since there will only be a few of them, they can negotiate for lower prices.

Therefore R&D is under funded by private companies, because they know that the market is limited, both by the nature of them being a public good and by the poverty of those affected. AIDS treatments, however, do have a big market of people willing and able to pay quite a lot to extend their lives. There is no externalities associated with treatment once the disease is already present in a person (unless treatment reduces chances of transmitting AIDS, which is possible)

The relative markets for treatment is higher in the US: That’s why most of the HIV funding is in treatment and all vaccine research is on US strain B of virus;
ability to pay is higher here,

In addition to public good problem, gov. is only buyer, which means can negotiate a lower price than a “free” market would pay.

The vaccine purchase fund will simply provide economic incentives to find vaccines

Further questions

How could vaccinations for HIV in Africa or other help us? Is vaccination of others a public good? Who would fund? Why would wealthy countries have any incentive to fund vaccinations in poor countries? (Marshall plan?)

Do we have to have 100% vaccination for it to work?

Other factors that would inhibit vaccinations?
Cultural
vaccinations not 100% safe, there is a slight danger
vaccinations may have helped spread AIDS in Africa- shared needles
could spread other diseases while helping prevent HIV