What can economics tell us about the Ebola problem? First it can answer the question as to why there has never been a vaccine manufactured for human consumption, even though the virus was first isolated in 1976 and there have been a number of (small) outbreaks of the disease since. Second, it can point ways to a policy action that can lead to the widespread availability of such a vaccine.
First of all, some important facts. According to the New York Times, “Almost a decade ago, scientists from Canada and the United States reported that thye had created a vaccine that was 100 percent effective in protecting monkeys against the Ebola virus. … The researches said tests in people might start within two years, and a product could potentially be ready for licensing by 2010 or 2011. It never happened. The vaccine sat on the shelf.” (See “Ebola Vaccine, Ready for Test, Sat on the Shelf,” Denise Grady, NYT, October 23, 2014. Available on the web at http://www.nytimes.com/2014/10/24/health/without-lucrative-market-potential-ebola-vaccine-was-shelved-for-years.html?_r=0)
Why did this occur? The short answer is an economic concept known as MARKET FAILURE. What does that mean? In general, it means that the “signaling mechanism” of prices that supposedly communicate a combination of scarcity of the resources used to produce something and the desires of consumers to purchase it is out of whack – it doesn’t accurately signal costs and benefits. Forgetting the technical jargon, in practical terms, it means that businesses that derive income from the development and sale of pharmaceuticals will not willingly invest the resources necessary to bring such a vaccine to market. In the words of one expert, this is because Ebola is an “unprofitable disease.”
[For details see “An Unprofitable Disease: In the Political Economy of Ebola, Who Lives and Who Dies?” Democracy Now, October 16, 2014. Available at http://www.democracynow.org/2014/10/16/an_unprofitable_disease_in_the_political)
The research to create the vaccine described in the NY Times article from October 23, cost a few million dollars. However, the human trials and the scaling up of production would cost closer to one to one and a half billion dollars.
Still, given the dangers of Ebola, why didn’t pharmaceutical companies do those clinical trials? Many economists (not including me but that’s for another discussion) argue that since pharmaceutical companies have to engage in lots of up-front spending to do the research necessary to get drugs approved, they need patent protection of a (temporary) monopoly so they can change high enough prices to make the risk of all that up-front research spending worth it. Why wasn’t the payoff to a temporary monopoly of the first successful Ebola drug enough to compensate for the billion (or billion and a half) of research costs. This is where Ebola emerges as an “unprofitable disease.” Once you vaccinate someone for Ebola, that’s the last time they will spend any money on your product. Compare that to insulin for diabetics or anti-cholesterol drugs for heart patients. Patients with diabetes or arteriosclerosis take a pill or an injection every day for the rest of their lives. Rapid growth in the demand for a new product is the chief incentive to spend the money developing it. Ebola is an “unprofitable” disease because the treatment is not something that the drug company can sell you every week, month or year. Once you get vaccinated, maybe it lasts for five to ten years – On top of that, in most of the world very few people are at risk to catch Ebola. In the US, for example, it would only be those who regularly travel to places experiencing an outbreak or health care professionals going to treat victims. So most people will not even bother to get vaccinated.
Finally, the countries of the world where universal vaccination would be absolutely essential cannot afford to pay the high prices a drug company would charge using their temporary monopoly (also known as a patent) to recoup the money spent developing the drug.
By the way, this is why lots of successes in the field of pharmaceuticals have actually relied on government funded research. This is the key to the outstanding book, that I have often referenced on this issue, Merrill Goozner The $800 Million Pill: The Truth Behind the Cost of New Drugs (The University of California Press, 2005)
The Goozner research points the way to a solution to the problem of market failure in the development of an Ebola vaccine. Governments could directly finance the clinical trials of the vaccine that had worked with monkeys a decade ago and they could then go on to promise to buy thousands of doses of the final product once the human trials have been successful. This would keep the pharmaceutical companies happy because they would be guaranteed a profit on their development and sales of the new drug. This is in fact what happens in defense procurement when the government signs a “cost plus” contract with a company like Boeing.
A much more efficient and decidedly less expensive way would be for the world’s governments to chip in to cover the costs of the trial and then use their own facilities to manufacture massive quantities of the drug making the vaccine available free of charge.
I can hear the complaints now. Why should we spend a billion dollars plus to help those countries in Africa? We’ve got enough problems here at home. I doubt that most Americans would begrudge the people of the countries in Africa suffering from the largest outbreak of this disease in history a billion, two billion, even 10 billion dollars to control this epidemic.
For comparative purposes, our nation’s defense budget (at least the public one) stands at over 600 billion dollars. Arguably, containing the current outbreaks of Ebola are part of the defense of the US – not against foreign invaders with missiles but against the viruses that have already made their way into American citizens as a result of the current outbreak.
I’m willing to bet that the basic generosity of the American people would support such an increase in spending. This is especially true because polling data indicates that Americans believe spending to help foreign government is much higher than it actually is and when asked to suggest an appropriate amount, almost always propose a number higher than what is actually spent now. The lesson of the market failure that has led to the unconscionable delay in actually using the already discovered Ebola vaccination is that for some things, the private enterprise system fails miserably.
I don’t want to ignore the fact that the government is an imperfect tool for correcting market failure. However, it is the only alternative and for many things – drug and food safety, airline safety, basic medical and scientific research it’s the only thing we’ve got.
Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author (with Howard Sherman) of Principles of Macroeconomics: Activist vs. Austerity Policies.
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