Question

CBC news: For months, more than 150 teams around the world have been working at an unprecedented pace to develop a vaccine against the new coronavirus. Ten of those vaccine candidates are now in Phase 3 clinical trials, in which each is given to thousands of people to ensure it's both safe and effective — the final leg of the process before their potential approval. In the fight against COVID-19, that feels like a light at the end of a long, dark tunnel. But once at least one vaccine is approved, what comes next? "Approval itself is not going to be an overnight solution," said Matthew Miller, an associate professor at the Michael G. DeGroote Institute for Infectious Disease Research at McMaster University in Hamilton. "There's going to be a significant amount of time required to distribute the vaccine and then have enough doses prepared to administer to the population." Public health and vaccination experts also say the months after Canada starts acquiring a vaccine will be rife with challenges, both logistically and ethically, as public health officials will need to determine which groups should get priority access — be it health-care workers or other vulnerable demographics — as production scales up to meet demand. "There will inevitably be supply chain issues," Miller warned. "It's going to take time for the vaccine manufacturers to produce enough doses, and there's going to need to be prioritization over who will get those first doses when they become available."

For the news above, please answer the following:

(1). Does an externality exist? If so, classify the externality as positive/negative (or both).

(2). If an externality exists, determine whether the Coase theorem applies. Explain why or why not.

(3). If an externality exists and the Coase theorem does not apply, argue which of the government’s tools are best suited to address the issue. List all the government tools that you have learned and explain.

Answer 1

(1) Exteranlity is a cost or benefit initiated by an economic agent but not respectively incurred or received by that economic agent.

In the given scenario, positive externality exist as the invention of vaccine will immensely benefit mankind but equivalent reward is not expected for the inventor.

(2) Coase theorem states that counter parties tend to settle on the efficient set of inputs and outputs.

The throrem does not apply in the given scenario as it is difficult to pass the hurdles of underlying assumptions of the theorem viz., perfect competition, zero transaction costs, perfect information, efficient markets, same market power, etc.

(3) Below government interventions are best suited to address the issue:

• Creation of patent pool to reduce the licensing fees, litigation expenses and final product prices.
• Provising financial aid for MOR - Mission oriented Research & Development (R&D), tests and administartion.
• Factoring in R&D costs (major costs) in addition to manufacturing costs (comparatively minor costs) for pricing policy.
• Price differentiation depending on capacity to pay.
• Market driven competition between countries
• Supplemeting market forces by focussing on maximum coverage and maximum social welfare in shortest possible time. For eg., few countries have aleady decided the order of vaccination using sociology and demographics: medical fraternity, elderly or sick, children and so on.