Marginal Revolution: Kremer's Prize

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Kremer's Prize

The Advance Market Commitment for vaccines launched on friday. Under the commitment a group of developed nations (Canada, Italy, Norway, Russia, the United Kingdom) and Bill Gates! (The Bill & Melinda Gates Foundation) promises to pay for a pneumococcal vaccine suitable in price and effectiveness for the developing world. The idea, the brain child of economist Michael Kremer, could save millions of lives over the next several decades. Kremer deserves a Prize for his Prize - in Peace or Economics.

Owen, who played a part in the project, has more background and musings.

Posted by Alex Tabarrok on February 10, 2007 at 09:51 AM in Economics, Medicine | Permalink

Comments

Owen writes: "The donors create a reward for the private sector - the prospect of a lucrative market for vaccines - which enables firms to invest in developing and producing the needed vaccines. But if the research fails it will cost the donors nothing. The taxpayer will only have to cough up if the vaccines are actually developed and used."
This is incorrect. Researchers are a scarce good, and time researching vaccines against pneumococcal infections is less time spent on researching vaccines for other diseases. Only the market can show which kind of research is needed most. I do like the commitment of the Bill & Melinda Gates Foundation though. They -are-
a private organization, they get their gifts from the market. The governments involved do not.

Posted by: kurt at Feb 10, 2007 1:57:29 PM

kurt, he wrote "But if the research fails it will cost the donors nothing." So, he is saying I think that the donors themselves are out nothing if the vaccine does not emerge, not the researchers. The social costs vs. the private costs, in other words.

Posted by: Jason Voorhees at Feb 10, 2007 2:09:03 PM

As Jason says, the donors are not out of pocket if the research fails.

Kurt worries that this may displace other research.

Promising to buy vaccines, if they are successfully developed, expands the overall market for vaccines. So it will only displace other research, as Kurt fears, if the supply of vaccine researchers is inelastic. Assuming that, over a reasonable time, the amount of researchers and research can be expanded, the effect of an increase in the overall market for vaccines is to increase total research, not to divert other research.

Futhermore, Kurt implies that governments are somehow distorting a market here. In practice there are significant market failures that reduce the demand for vaccines, which this demand will help to offset. The market failures are explained here:
http://www.bepress.com/ev/vol3/iss3/art1/

Owen

Posted by: Owen Barder at Feb 10, 2007 3:15:48 PM

Thus does the kingdom of Bill place its mark on the future of the world. Go Bill.

Posted by: am at Feb 10, 2007 6:28:30 PM

Kurt: Wouldn't you say that taxation skims the market?

Posted by: Paul Allen at Feb 10, 2007 6:59:58 PM

This is incorrect. Researchers are a scarce good, and time researching vaccines against pneumococcal infections is less time spent on researching vaccines for other diseases. Only the market can show which kind of research is needed most.

Only in the short term. In the long term the extra capital in the industry is going to encourage more scientists to invest their time to biomedical research.

Posted by: Adrasteia at Feb 10, 2007 7:46:04 PM

In all this talk about prizes, is somebody going to point out that a prize system could be a feasible alternative to our entire system of patents? The patent system, although defended vociferously by libertarians, is one of the largest government interferences with the free market, and causes massive static economic inefficiencies.

Posted by: MQ at Feb 11, 2007 5:13:24 AM

Isn't problem in the modern world overpopulation?

Posted by: Kino at Feb 11, 2007 5:52:28 AM

Are "vaccine researchers" different from general researchers? I was under the impression that clinical trials (requiring large numbers of regular doctors and nurses) were the largest component of R&D costs. To the extent vaccine PhD researches in the labs are different, Adrasteia and Owen are right -- more funding will shift more grad students to vaccines fairly quickly. I would be concerned about a crowding out effect hurting medical clinics in the 3rd world, not about hurting the pool of researchers.

Posted by: DK at Feb 11, 2007 8:13:51 AM

"In all this talk about prizes, is somebody going to point out that a prize system could be a feasible alternative to our entire system of patents?"

I think Dean Baker and John Quiggan have argued that line, which I find deeply unconvincing. Prizes can be very useful when there's a specific problem to solve or whyen you just want a single very neat innovation.

Prizes would be pretty lousy for general drug development, because the prize-giver would have to calculate the prize values for all possible drugs. This would, of course, not only be impossible, but would be subject to endless political manipulation.

Patents, on the other hand, are a very good mechanism, because the market itself determines the value of the prize, because the value of the patent depends on the market demand curve. There's no central planning or valuation issue. That's why prizes will not (or at least should not) replace patents anytime soon.

And, at the end of the day, if a government finds the static welfare losses of a given patent to be unaccetptable, the government can just buy out the patent.

Posted by: Keith at Feb 11, 2007 12:39:51 PM

"Only the market can show which kind of research is needed most."

I'm sorry, but that's complete B.S. Market mechanisms do an excellent job of showing what is economically valued in the short term by those involved in the market. And not much more. This is an example of an unfortunate tendency to absolve ourselves of the difficult consideration of issues of ethics and morality and let other people (i.e. "the market") decide.

The over-simplicity of this comment is also easily demonstrated--markets in pollution credits or carbon dioxide emissions are useful mechanisms. "What's needed most" was decided by other means. The markets are artificial and are created as mechanisms to carry out decisions already made about what is good and valuable to the society. And they are only one of many possible such mechanisms. Whereas the generosity and recognition of our common humanity (and shared fate) that drives at least some philanthropy smells a lot like somebody has had the courage to confront some of the difficult questions facing us, and should not be discounted.

Posted by: Francis St. Amant at Feb 12, 2007 1:27:43 PM

This research and development for vaccines will ultimately cost more than just the few countries and Gates, but the question is whether the cost is worth the benefit? It will use up some scarce resources by taking researchers because the market for vaccines will expand. However, everything uses scarce resources and if the development of these vaccinations is successful, why not buy them? I would say that the external benefits from these vaccinations would offset using scarce resources.

Posted by: Ricky Stout at Feb 13, 2007 12:43:01 PM

Posted by: Ricky Stout at Feb 13, 2007 12:44:16 PM

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