Should vaccine development and distribution be left to the private sector, public sector, or both?

 

Vaccines are a merit good. They are excludable (they can be charged for) and are rivalrous, in that different companies can produce different versions. The market could in theory therefore produce a vaccine. Start up costs are however very high, so initial average and marginal costs would be high. This is because fixed costs are high, and also because safety measures, tests, and liabilities if things go wrong, are expensive and take a long time to work through under normal safety protocols.

Vaccines have high positive externalities and to really work require widespread coverage. This generally means that the social optimum for their provision will be different from the market equilibrium. This is because in a market, people will pay for the drug or vaccine up to their own marginal private cost, at the point where that meets marginal private benefit (equal to marginal social benefit.) For society, it would be better for the provision to be at the social optimum, where marginal social benefit equals marginal social cost.

This social optimum will require one of several policies to be in place. Either states require everyone to have a vaccine by law, and to pay for it; or they make the vaccine virtually universal by subsidising it; or states make their own, and get everyone to take it. This will ensure widespread coverage.

Realistically, only the private sector will have the expertise and economies of scale to provide a vaccine. This is because of the start-up costs and knowledge involved. As noted, a vaccine is not quite a good in natural monopoly, but it is similar to what could be called a good in natural oligopoly, in which only a few companies have the resources to produce and test the vaccine.

This is why most states require and pay for or subsidise vaccines, but to balance the long development and safety check time, allow producers to enjoy a monopoly for a period of time to recover their costs.

One can find examples of state and company misfeasance in this or similar processes, but not in recent years (unless of course there has been, and we don't know of it!) For example, the Thalidomide and Polio scandals testify to that, though both were exposed and ultimately punished. 

In the case of very fast emerging and new challenges like covid, or viruses which jump from the animal world, the standard, tried and tested model might be too slow. Every government policy is a choice and a balance. In the case of covid, the choice was to attempt to develop a vaccine that was safe in a short space of time, or suffer the collapse of healthcare systems and permanent large falls in GDP.

This is what lay behind the British and American approach of using government power and contracts to order multiple different vaccines from different companies, allowing those companies to set their own prices within negotiated limits (Astra Zeneca did it at cost) and giving them a guarantee that they would not be liable if there were failures in vaccine delivery. The UK agreed to cover any costs from failed vaccines, and that companies would not be sued for a ‘bad vaccine,’ for instance. It would still be, however, that there was potentially fatal reputational damage to any company that didn’t produce something that was safe and which didn’t offer protection so a balance was struck. This process was pursued intensively, and resulted in multiple different vaccines, effectively produced by the private sector and paid for and regulated by the public, very quickly.

By contrast, those states or groups of states which sought exclusive deals to produced one highly regulated vaccine and not to protect or reward the companies producing the vaccine except with a fixed payment were late and did not gain much advantage from their programmes. In the United States, individual states which have decided to try to produce their own vaccine have also found that they did not have support from the public or industry and did not have the capacity to make as much as big companies.

So a public-private partnership, taking advantage of oligopoly economies of scale and offering some protection or financial incentive to private companies, with their stock of knowledge and capacity, but limiting that by regulation and the threat of reputational damage, would seem to be an effective way to produce quick vaccines.

State requirements powered by health system purchases to gain vaccines from private companies working with universities in less urgent times would also seem to be a better model than states attempting to make vaccines themselves. If states threaten to seize private supplies in an emergency, the policy might result in private companies not producing any more at any time, or demanding higher prices to cover their risk, but of which are ‘sub-optimal’ outcomes.

There also appears to be differences between vaccines and, interestingly, test and trace programmes which could be said to be equivalent in terms of public protection. States have proven bad at encouraging or requiring individuals to self-isolate, download apps, or even at providing the apps, and private providers have found themselves (in the UK) rejected in favour of expensive and inefficient systems. By contrast the government-led but privately delivered vaccine programme, organised via the NHS as a monopsony provider, has been a success in terms of speed and delivery.