One Nation, One Price

Context: India’s new COVID 19 vaccine policy that allows for half of the production prices to be controlled by the government and the other half to be sold in the open market at pre-announced “self-set” prices needs a rethink.

Positive features of market-based solutions: Efficient because of the following -

• Access: The market makes available any good to a buyer who values it the most.
• Low cost: Increased competition drives up supply and pushes down prices, so that only the lowest cost producers are able to operate in the market. This combination leads to an efficient allocation of scarce resources.

Arguments in favour of the move:

• Ensures faster delivery of the vaccines, and thus the country would be better off even with some under-provision.

Arguments against the move:

• Market isn’t the efficient mechanism of allocation of vaccines: The positive consequences of market-based solutions are true only when there are no externalities present; however, vaccines do have “positive externalities” and are thus considered as a public good.
  • Positive externality means that a vaccinated person is not only relatively protected against the disease himself/herself but also less likely to transmit it to others.
• Results in differential access to the vaccine: If there is no price limit, there is a risk of scarcity in the “mass” segment co-existing with a glut in the “elite” segment.
  • While the manufacturers are supposed to declare in a transparent manner their prices in the open market, there is not limit on the retail price they would charge.
  • This could lead to a whole range of prices and vaccine inequality, apart from diversion of supplies from the controlled low-price government centres to the open market.
  • This may also result in economic inefficiency and market failure:
    • Market-based solutions for goods with externalities may result in “under-provision” or “over-provision” (too little or too much) of the good and a situation of “market failure”.
    • The market ignores those with lower purchasing power, despite them having a higher probability of spreading the disease.
    • For e.g., While the better off can afford to work from home and have positive externality (as they would not infect others), the blue-collar workers ironically cannot afford the vaccine while having negative externality (can infect others).

Way forward: To stimulate production and to ensure efficient vaccination.

• Administer a fixed single price: that is high enough to ramp up production.
• Subsidise vaccination of the poor: A mechanism similar to fertiliser subsidy, wherein the vaccine producer gets the full market price from the government once the person gets the jab.