Allocating the vaccines: central planning or the free market?

In the short term, there are only a few million doses of the COVID vaccines available, but well over 100 million adults in the US that want to take the vaccine if offered for free to the consumer. There are also billions worldwide that would like the vaccine.

So who should get it first? In practice in the US, the allocation method has already been determined politically: the federal government will allocate vaccines to the states, and states will allocate them to individuals based on a priority list: health workers and the most vulnerable first, then teachers, etc. The NY Times has a tool that shows you your probable place in line.

But essentially the allocation method being used is central planning.

John Cochrane has proposed a “free market” solution: sell the vaccine to the highest bidder. Or at least, sell some doses to the highest bidder.

As an economist, there is always some appeal in thinking about a free market solution. But there is a problem in this case: there are positive externalities from taking the vaccine. It not only benefits me, but it also benefits others. My willingness to pay only reflects the benefit to me, the private benefit. The social benefit is mostly ignored by a simple auction, and in the aggregate for a vaccine most of the benefits are likely to be social benefits. But positive externalities don’t imply we need to use central planning!

Cochrane briefly mentions externalities but waves his hands saying this would imply people going out to bars should get the vaccine first since they are the most likely to spread it. But I think he is dismissing externalities too quickly.

Is there a way to satisfy both the high willingness of some individuals to pay with the large social benefits? Here’s one idea: a silent auction with some additional consideration added in for those that deemed priority recipients of the vaccine.

How would this work? Anyone who wants to receive the vaccine places a silent bid for how much they are willing to pay (perhaps we should use a Vickery auction or single-price auction — I will leave those details up to economists who specialize in auction theory). The government takes these bids and then adds on an additional amount based on the perceived social benefit from you receiving the vaccine bases on your occupation, age, health status, and so on (counter-intuitively, for a highly effective vaccine it may be best to give it to young people first — central planning is hard!). Those with the highest combined bid receive the vaccine, but they only pay what they bid.

Should the government actually pay the social benefit amount to the vaccine manufacturer in addition to the private bids? It doesn’t really matter for the allocation purposes. I am tempted to say “no”: the vaccine manufacturer is already getting the legal patent protection, and the government is conducting an auction for them which essentially allows them to engage in perfect price discrimination. But it doesn’t really matter for the allocation.

But doesn’t this process involve a bit of central planning too, and depend on the government assigning the “correct” value for the additional amount added to the bids? Yes! Of course it does. But importantly, it involves much less central planning than the current method being used.

As an upshot, this auction process is much lower cost for the government, especially if they don’t actually pay the social benefit amount. I don’t think this is the biggest benefit of my method, but it’s worth considering.

Finally, does it seem fair that healthcare workers, who have already performed heroically in this crisis, should have to pay for something that they are getting for their job? But that’s the beauty of this system: hospitals can bid for their employees’ vaccines! And so can other employees. In fact, under this system it is likely my bid would be a combination of my willingness to pay and my employer’s.

While many debates are set up as being “free markets versus central planning,” when there are significant positive externalities we aren’t in the simple world of those two options. While Cochrane’s answer that we use the free market is what a student might say if they stopped showing up to class after the first few weeks of microeconomics, Cochrane’s critics are making an equal error by just shouting “positive externalities, market failure!” and then assuming the only other option is central planning. I have no doubt that my proposed solution won’t be used for the current allocation of vaccines — that has already been determined politically. But it is useful to think about how we should allocate goods with positive externalities, especially when the positive externality is not the same for every individual (when the externality is roughly the same for everyone, the solution is rather simple: government subsidizes production, then let’s the market allocate the good).

One last objection: what about the poor? Doesn’t auctioning a vaccine mean that the poor are less likely to get it? But this is a problem of all market allocation of goods and services. There is no particular problem when it comes to a good with positive externalities, unless the positive externalities for a poor person getting a vaccine are on average much larger than a rich person. But if this were the last objection standing in the way of my plan, there is a familiar solution: lump-sum transfers. Give poor people some amount of money that they can use to bid on the vaccine — but as always, also allow them to spend it on other things if they wish!

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