Monday, October 5, 2009

Should the H1N1 Vaccine be Sold?

We are big believers in markets to distribute products to those who value the product most. However, economic theory recognizes that personal willingness-to-pay may not be a good measure of economic value when the product is homogeneous and when income differences among customers are large. That is, I have no reason to believe that the marginal utility from avoiding the flu is greater for my college president than for his secretary, but I suspect his willingness-to-pay would be many multiples of hers. In fact, even if his marginal utility was a fraction of hers, he might outbid her simply because he has more income. Thus, if we allocate based on price alone, we are not likely to maximize total utility.

OK, a price system may be less than perfect, but is it better than the alternative? Is there a simple mechanism for discerning where the value is highest? We know that health professionals are at greater risk and we know the age cohorts that are more at risk. We know how the flu is spread and so can target areas where transmission is highest. In this case, I would argue that an average bureaucrat could devise a low cost, yet high return rationing scheme.

What is lost by not selling? First, one loses the the price signal. I suspect that, were it sold, the vaccine price would be quite high initially and then fall dramatically as it mitigates the effect of epidemics. How fast it falls and where would be valuable information for allocating supplies. Second, one loses the profit motive. Not only does the price identify where demand is highest, it also provides an incentive for distributors to meet demand. I suspect these supplies would flow to the greatest need faster than if allocated solely by bureaucrats. Third, one can price discriminate. For some the personal willingness-to-pay will be low, too low. I mean that they will not incorporate the positive externality that they confer onto others in their personal calculations. A reserve of funds from initial high demanders can subsidize these low demanders.

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