When is the price of a good or service ‘right’? The question comes up regularly, whether about the cost of a taxi during a downpour, the fees for a qualification in nursing or the astronomically-priced “spaghetti” at the restaurants of the much-memed chef Salt Bae. It is rarely a straightforward question to answer, no matter how much philosophers or economists grapple with it.
The case of surplus COVID-19 vaccines is a case in point. Many rich countries pre-ordered vast quantities of COVID-19 vaccines when they were still in development, enough to vaccinate their countries many times over. According to the Duke University Launch and Scale Speedometer, Canada has paid for enough vaccines to vaccinate its population five times over; the UK enough for four times over, and the US two times over. These vaccinations are helping to bring the pandemic under control in each of these countries. They now, however, have many million spare vaccine doses. It is brilliant news that the UK plan to donate 100 million of its surplus doses to developing countries, and that this support will be additional to its existing (albeit heavily pruned) aid commitments. It is even better news that the US is purchasing 500 million doses for developing countries, though the total of 870 million donated vaccines announced by the G7, less than a tenth of what is required to end the pandemic, remains distinctly underwhelming.
But these announcements, mixing newly purchased doses and surplus doses left over from the developed world’s plans to vaccinate their own populations, raise a question. What is the right ‘price’ to pay for surplus vaccines, as opposed to those newly purchased? And how much of their value should be counted as Official Development Assistance (ODA)? The choice matters for two reasons: firstly, it sets a precedent for the valuation of secondhand goods as development aid, which in turn sets incentives for donors. And secondly, some donors operate an ODA ceiling: in a very real sense, every dollar allocated as ODA for these surplus doses crowds out other, life-saving aid. It’s great that this year, the UK has chosen to make these doses additional to its existing ODA, but in the future they or other donors may not make the same choice. Charles Kenny suggests the value of these doses as ODA is ‘not much’, and I agree. In fact, you should probably go even further.
Here’s a good starting estimate for the fair, and economically efficient, price for surplus vaccines: $0. And if it’s not exactly $0, it should probably be far closer to $0 than it will eventually land.
The arguments for surplus vaccines being priced at $0 are straightforward. Any price higher than zero does not reflect costs borne by rich countries in order to help the poor; any price above zero has nearly no positive incentive effect on either the primary or secondary markets for vaccines—that is, charging for the vaccines won’t increase the supply of them in the future; and pricing above zero has no benefit in terms of efficient distribution of the vaccine to where it’s needed. Let’s take each argument in turn.
Rich countries have these surplus vaccines in hand, ready to donate to poorer countries, not because of the goodness of their hearts but as a by-product of the pursuit of an optimal strategy for their own benefit. They made huge advance purchases of multiple vaccines not to help other countries but because it made economic sense for themselves. The large purchases stimulated huge investment in the development and manufacturing capacity of many vaccine candidates, which was important for these large countries. They also functioned as insurance: some of the vaccine candidates might have failed, and they needed enough vaccines to fully vaccinate the population even if only some candidates were useable – though rather amazingly, the vaccine candidates have mainly been far more successful than the most optimistic among us expected, hence the surplus doses. And by making huge purchases (often coupled with grants to support research) they got to the front of the world’s vaccination queue.
These choices paid off. Rich countries are off and running with highly successful vaccination programmes. The extra doses they have are part of the price they paid for this. Counting the value of these doses as ODA would not be restitution for efforts made to support the poor. Even worse, if it displaced other ODA spending it would mean less life-saving aid for all of the non-COVID problems that have not gone away or less money available to buy additional vaccines through Covax—both of which are deeply necessary, because the economic shock to poor countries has heightened needs, and the surplus doses donated fall pitifully short of what is needed to vaccinate the rest of the world.
This brings us to the second argument: what if preventing donor countries from claiming these doses as ODA disincentivizes them from sharing? Or perhaps disincentivizes the future production of vaccines by manufacturers? On closer inspection, these fears are unwarranted. All the costs incurred to date in the purchase of these vaccines are sunk costs—that is they are irrecoverable and should be ignored in calculating the efficient strategy for rich countries from this point onwards. What’s more, vaccine doses have a shelf-life, and rich countries face a choice: use these vaccines or throw them away—there is no other use for them. Throwing the vaccines away generates zero value for the donor country; that’s the benchmark the return achieved from using the vaccine needs to clear. But this benchmark is cleared even if the price charged for these doses is zero: rich countries will derive direct benefits from the vaccination of people in poor countries insofar as it facilitates travel, trade and stifles the emergence of new variants of COVID that threaten public health among the largely vaccinated rich world. In fact, since these benefits are likely to be large, it makes sense for rich countries to pay poorer countries to take the surplus vaccines and administer them quickly. The faster the rest of the world is vaccinated, the greater the benefits to the rich. In this case the socially efficient price for surplus vaccines is negative.
A zero price also has no disincentive effect on vaccine production. Vaccine manufacturers have already sold those doses; they derive no additional benefit from on-selling at any price. Note that this is only true of surplus vaccine doses, not the new doses to be bought by the US or Covax. Those must be paid for, and they must be bought in large enough quantities to make it an economically sound strategy for vaccine producers to invest in vaccines that are effective against variants found in poor countries. This is another argument for giving away the surplus doses and concentrating resources on the purchase of new production from manufacturers.
The last argument that might support a price above zero for surplus vaccines is that the price mechanism may be an efficient way of distributing these doses. There are three arguments against this. Firstly, the ability to pay and willingness to pay, and even the marginal benefit of each vaccine delivered, are unlikely to be correlated. Vaccine doses do the most good when they are used where they are most needed, regardless of ability to pay or competing priorities. In some of the places where COVID vaccines would be most valuable, they are still less valuable than investments that fight other, more costly, local diseases. Allocating doses according to price is unlikely to be efficient. Secondly, the use of the market as a distribution mechanism assumes that there is no widely accepted and functioning alternative apart from queuing—this is not the case. Covax offers a way of distributing excess vaccines efficiently, allocated according to need and ability to administer them. And thirdly, for the market to work well as an allocation mechanism, price would need to be allowed to vary fully, and all countries should be allowed to participate—a full-scale secondary market for surplus vaccines. The fact that this has not yet emerged suggests there are moral and optical barriers to rich countries setting up such a secondary market, which would—for them—carry the whiff of a black marketeer profiteering in World War 2.
In Lady Windermere’s Fan, Oscar Wilde described a cynic as “a man who knows the price of everything and the value of nothing”. In the case of surplus coronavirus vaccines such a man would not just be a cynic, but a bad economist.
This blog benefited from excellent comments by many colleagues. All mistakes are the author’s.