Public Policy, Market failures and Vaccines
By Rakesh Kumar Yadav
The domain of Public Policy deals at the intersection of State, Business and Society. Vaccine is one of the biggest public policy interventions of current times. IMF Chief Economist Gita Gopinath has said that the vaccine policy of countries will be the biggest economic policy for the next few years as how different countries shape their vaccine policy will determine their future in this decade or even for decades to come later on.
However, different countries have responded differently in terms of their policy response. In this article we will try to see what kind of goods vaccines are from a public policy lens and what kind of Policy response should ideally have been undertaken. We will also look specifically at India and how proper market failure diagnosis could have helped better handle the human catastrophe that we witnessed during the second wave .
Market failures and Vaccines
The domain of Public Policy deals with Market failures. It is only when there is enough evidence of market failures, government intervention is justified (Kelkar and Shah). There are basically four types of Market failures- Concentration of Market power, Externality, Information asymmetry and Public Goods. There are few others namely - Transaction costs, Partial equilibrium effects among others. Only when there is evidence of one or more of these market failures, should any government intervention ought be undertaken or even is justified.
In the case of vaccines in India, most of the public policy actions have been confusing and it seems policymakers have been acting without much understanding of these market failures. Different kinds of market failures which exist in vaccines include - externality, concentration of market power, and high transaction costs. Each of these induce different kinds of market failures and hence justifying government intervention. However, the intervention under each of these market failures will be different.
Market failure #1: Externality
Vaccination has positive effects beyond individuals and provides indirect benefits to the unvaccinated (WHO). Marginal social benefits for vaccines are more than the Private benefits and hence there is underproduction of such goods, as bystanders who benefit from vaccinated people don’t have an incentive to pay for the same.
In the public policy, for goods which have positive externality, Government intervention should be financing the positive externality. With this insight, the ideal policy response for vaccines would have been to finance the vaccines.
This financing could have been done at two levels-
Finance the production- Government should have financed firms like Serum Institute and Bharat BioTech early on and asked them to increase their production capacity post the first wave. The government delayed it . This has been precisely done now post the 2nd wave where the Government has invested 4500 Cr on Vaccine production. This is what countries like the US, UK and other developed world countries did in the early days of the pandemic and consequently some of these countries have the capacity to vaccinate their population at least 10 times. India should have taken cue from this.
Financing the vaccine for citizens- The financing can also be done at the citizen level by making the vaccines free for all citizens. As these vaccines have positive externality, vaccinating more citizens by making it free will help everyone and will help enable countries to fight it quickly.
Market failure #2: Concentration of Market Power
The second market failure within India has been concentration of vaccine production into two players only- i.e. Serum Institute of India and Bharat Biotech. Vaccine production has become a duopoly. Even within these, Serum is producing about 90% of vaccines and Bharat BioTech is producing only 10% of total vaccines, making it a virtual monopoly. This has created excessive dependency on these two players only for vaccines.
During the peak of the pandemic, it was seen that these two players were unable to meet the demand from states for vaccines and that consequently slowed down the pace of vaccination. The two companies also fell short of their initially promised production target month on month. As the market was concentrated between these two, the government could not do much then.
The solution to such concentration is the introduction of more competition. The policy should have exhibited more foresight initially and should have invested in diversification of production beyond these two players. Though, post the 2nd pandemic government has realised this and has started importing vaccines or is in an advanced stage of procurement from various countries outside India. However, these should have been done much before as more competition always helps.
Market failure #3: Transaction Costs
Transaction cost is the cost involved in making any economic transaction in the market. These primarily involve search costs, bargaining/ negotiation cost, and logistic cost.
During the middle of the pandemic, the Union Government in what they called “liberalised” the vaccine market. Rather than the Central Government themselves only dealing with vaccine manufacturers, states could also now deal with these manufacturers and negotiate prices and quantities. This was done to “unleash free market energies” into the vaccine. As price is a signal to the suppliers, which India desperately needed during the peak of the second wave, it was thought that the increased prices would incentivise the suppliers to ramp up production quickly.
Though well intentioned but laden with the possibility of many unintended consequences, this added many layers of transaction costs in the system and added unwarranted chaos. As vaccine procurement prior to Covid has mostly been handled nationally and states did not have prior technical capabilities to deal with such procurement, this added a level of complexity entirely unknown to state machinery. Multiple states doing the repetitive task of discovering vaccine prices, floating the bids (which they were not comfortable with) and negotiating prices and quantity with Serum and Bharat BioTech was unnecessary and completely uncalled for.
This simply increased the negotiation/bargaining costs for everyone and at a time when you want things to move more quickly than ever. This could have been simply handled by one Government i.e. Union negotiating one price with the vendors, procuring on their own and then distributing it to states, which is what is eventually being done now and was being done earlier as well. There is no policy without politics and it is said by many experts that this “liberalisation” was political too given the projected vaccine shortage for the months of May and June, when covid had peaked. However, the key policy lesson is adding unnecessary transaction costs, and that too in a time critical situation like Covid, adds more problems than solving them.
Conclusion
Thus we saw that a better diagnosis of market failures in vaccines, would have elicited better public policy response. While the positive externality aspect would have signaled to finance the production, the concentration of market power could have been tackled through better regulatory foresight and bringing in more competition into the space and not making it virtual duopoly. The unnecessary liberalisation of vaccine procurement had its own unintended consequences with increased transaction cost with multiple states negotiating the prices etc.
The better diagnosis of these market failures by policy makers would have elicited better policy responses and maybe could have helped save many lives.
This article was originally published in the Policy Wonkery Newsletter.
The author is a student of the 29th cohort (May 2021) of our Graduate Certificate in Public Policy (GCPP). Views are personal and do not represent Takshashila’s policy recommendations.