Price controls for vaccines?

Business Standard, 8 March 2021

The great Indian vaccination story has begun. Private health care firms will be required for reaching the masses. A basic tenet of economic policy is that price controls work poorly. If price limits are brought in, this will limit private outreach to cities. India's experience with household finance offers a nice example of an analogous problem, where reaching the remote corners of India required price determination by market forces. Government should do less, and let the market system work its way through this problem. If there is a desire to intervene, the best path is vaccine vouchers.

The miracle of vaccines

About 20 million people in India have been vaccinated by the end of February. This is a triumph of communicable disease control; there has never been a mere one year gap between early fears of a novel pathogen and the large scale rollout of a vaccine against this. The fact that the world's largest producer of vaccines is a private Indian firm (Serum Institute of India Pvt. Ltd.) gives pride to every Indian. Vaccination will help reduce the disease burden. Vaccinated people will go forth and live, helping bring normalcy into the economy and society.

Outreach using the private health care sector

If the current run rate of 1.5 million people vaccinated per day is maintained, it would take about 666 days to cover a billion persons with the first dose. It would be nice to go faster, as every day of reduction in the time to normalisation of the economy is precious. The present process design of the vaccination program is centered on big health care faciliites in cities. As its natural catchment depletes, the run rate could decline. And, there is the problem of the second dose.

The bulk of the Indian health care sector is in private hands. At each step in the Covid-19 story -- PPE, tests, drugs, vaccines -- we have seen the possibilities with the Indian private health care sector once it was given the freedom to act. Private pharmacies, diagnostic labs, doctors and hospitals are present all over India, and can get the vaccination run rate up by 10 times. Some people are concerned about the prices that private persons will charge, and there is talk about price controls.

Price controls in theory

From the foundations of economic thinking, we know that price controls are never the answer. High prices create the incentive to produce more and consume less, and vice versa. Markets convert shortages and gluts into price fluctuations, and price fluctuations make people change their behaviour in ways which solve the problem. Prices are an information system: the fluctuations of prices send messages to buyers and sellers to behave differently. If these signals are blocked, using the coercive power of the state, then buyers and sellers blunder on without changing their behaviour, and the underlying problems do not get solved.

Price controls: A story from the late 1990s

A story from the late 1990s gives insights into price controls for vaccines. Demat securities settlement came into India in the late 1990s, and the depository (NSDL) produced these wholesale services at very low prices. After that, a large number of consumer-outreach companies ("DPs") sell these services to individuals all over India.

In the late 1990s, there was a clamour for price controls. Many proposed that the government or NSDL should control the price that DPs charge the customer. It was argued that if prices were not controlled, DPs would engage in price gouging or that DPs would not serve the poor.

C B Bhave and others at NSDL argued that there was no market failure in the DP business. In a place like Bombay, the cost of producing DP services was low, given the prices of skilled manpower, telecom connectivity and reliable electricity. And, in Bombay, there was a large volume of customers for DP services. As a consequence, the prices paid by customers in South Bombay would be inevitably low.

In remote places, it was costly to produce DP services, and there were fewer customers. The only way to achieve last-mile outreach was to have high prices. If there was a price control, DPs would choose to not serve remote places, and DP services would be restricted to cities.

In a remote place, if a DP charged a high price, and earned a supernormal rate of return, this would attract others to start a competing business, as there was no entry barrier. The private sector would innovate and reduce costs.

In the event, non-interference prevailed: The price charged by DPs was left to market prices. Competition developed, and the prices charged to customers crashed. Competition ate away the profit rate in the easy urban sites, and DPs got the incentive to go forth into the great Indian hinterland, looking for more business. This generated outreach.

Price controls and vaccines

This story helps us understand price controls and vaccines. The private sector has the ability to do vaccination on a large scale. It is cheap and efficient for a private person to run a Sunday camp at a building in a big city. It is not cheap and convenient to manage the cold chain and get skilled personnel to remote locations where population density is low. A price limit would ensure that villages in India do not benefit from private vaccination services.

The private sector will innovate. As an example, the Johnson & Johnson one-dose vaccine costs more than the AstraZeneca vaccine presently sold by Serum Institute. But the cost and complexity of a two-dose vaccine is greater, particularly in remote places. Some private health care firms might find that it is better to import the Johnson & Johnson vaccine, for use in remote places.

Vaccines and price control is just a special case of a far reaching idea in policy making. Not interfering with prices is a hallmark of professional capability in public policy. To address the problem of positive externalities and poverty, where some won't choose to buy a vaccine, the solution lies in "vaccine vouchers", where the government pays private firms who perform these services.

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