Issues in Pricing Mechanism of Covid-19 vaccines 

Synopsis: A single price for Covid-19 vaccines will fuel production and ensure efficient vaccination.

Introduction 

Economists suggest market-based solutions for covid-19 vaccines due to their claimed efficiency. The market depends on the price mechanism and the forces of supply and demand. 

• Increased competition pushes up supply and pushes down prices. This combination leads to an efficient allocation of scarce resources. 
• However, the Market mechanism works well, when there is no externality is associated with the good.
  • An externality occurs when the production or consumption of a good results in the cost or benefit to an unrelated third party.
• Vaccines have a positive externality because their use benefits the vaccinated person and also reduces transmission t0 others.
• Almost everyone ignores the full set of benefits from goods with positive/negative externalities. Thus, the market isn’t the most suitable tool for the distribution of such goods. 

How the new Vaccine policy could result in vaccine failure?

The government is not considering the large positive externality attached to vaccination. This may result in inefficiency in vaccine delivery.

• Firstly, manufacturers have to declare their prices in advance for their 50 percent supply to the open market. However, there is no limit on the retail price they would charge. This might result in vaccine inequality. 
• Secondly, low-income people are naturally prone to infect others because of their nature of work. Low income has a higher negative externality and thus vaccinating them first is more beneficial to society. However, these people cannot ordinarily afford the vaccine. 
• Lastly, when the market is allowed to deliver vaccines, richer people will be prepared to pay more and will have better access. 
  • The market will ignore those with lower purchasing power, in spite of them having a higher chance of spreading the disease. The bigger the income difference between the two sections, the larger will be the degree of market failure.

What is the solution?

The new policy could lead to possible efficiency loss. The effective solution for addressing market failure is that a single price can be paid to vaccine makers for all the doses that they supply. The price should be high enough to fuel them to rapidly increase production. 

• The government will have to pay the vaccine maker or the hospital managing the dose. The suggested solution is similar to the fertiliser subsidy, which is now paid to companies only after actual sales to farmers. 
  • A subsidy is not paid on any bag unless the purchase, along with the farmer’s biometric authentication and other details, is captured on a point-of-sale machine at the retail outlet linked to a central server.
• The vaccine producer gets the full market price after a person gets vaccinated. It will also ensure no deviation or grey market. It is in our own interest to get not just ourselves, but also others vaccinated.Source: click here