Comment on Avian Flu--BECKER

Posner raises most of the important issues. I will make just a couple of points. Companies are reluctant to invest in developing vaccines or other protections against the Avian and other types of flu not only because of their legitimate fear of excessive litigation by those person who claim to have been harmed by the vaccine. In addition, and more important in combating pandemics, they will be forced during a pandemic to allow the production of generics and other much cheaper substitutes for effective drugs they develop, despite any intellectual property rights they are supposed to have. This has already happened with Roche's Tamiflu drug that apparently offers some protection against avian flu. The Taiwan government has forced Roche to license the island's health department to produce Tamiflu as long as Roche does not supply enough to meet the needs of the Taiwan population. Roche has also caved in to demands by Indonesia and a couple of other countries, saying its patent does not prevent their production of Tamiflu.Yet so far there have scarcely been 100 human cases of avian flu. Can you imagine the pressures on any company to either give away its vaccine or allow cheap generic versions if a widespread pandemic develops that could kill millions of persons in many nations, as happened during the 1918-19 flu pandemic and others discussed by Posner? These negative incentives for companies to develop vaccines is all the more regrettable since the world's population would be willing to pay enormous amounts to have a vaccine available if a serious deadly pandemic developed. Economists have estimated from people’s decisions about various life-threatening risks the amounts they would be willing to pay to reduce their risk of dying from an accident or from a disease. A young person in the United States is estimated to be willing to pay about $500 for a 1/10,000 decline in the probability of dying at each age. This means that 10,000 such young persons would be willing to pay in the aggregate about $5 million for such a decline in their risk of dying. The $5 million figure in this example is what economists call "the value of life" (to young persons for such risks). Suppose a million individuals in the US alone were at risk of dying during a major pandemic. If $5 million is taken as the value of a life, this gives a total willingness to pay by the million persons of about $5 trillion, or about ½ of US GDP, for an effective vaccine to avoid getting sick and dying from the pandemic. This is a very rough estimate that may be too large since some very elderly persons would die, and they generally put less value on living a bit longer. On the other hand, it is more likely a gross underestimate of what the world would be willing to pay since many millions of persons would also die outside America. Moreover, it may be a large underestimate even for the US since people would generally pay more to avoid the very large risks due to a deadly pandemic than the 1/10,000 improvement in risk that motivated the $3 million estimate I gave. So the world's population would be willing to pay a lot for an effective vaccine against avian flu, but companies are given weak incentives to spend a lot on developing such vaccines. That is the challenge posed to effective public policy, and I agree with Posner that so far the US and other governments have failed to meet the challenge.

Comments

[W]

BECKER: "So the world's population would be willing to pay a lot for an effective vaccine against avian flu, but companies are given weak incentives to spend a lot on developing such vaccines."

If the world's population is willing to pay a lot, then there's no reason to involve the government. Leave it to the free market, and manufacturers seeking to make a profit will swoop in. Government intervention is entirely unnecessary, so why should the government intervene?

[Ben]

Their point is that this is an example of market failure. Left alone, the market will grossly undersupply bird flu vaccine. Manufacturers don't swoop in, because there's a strong likelihood they won't be able to profit properly from their research.

One idea I've been mulling for a while with regards to intellectual property is to have an process whereby government would buy patents from manufacturers and then dissolve them, allowing anyone to produce the good. The benefit to the population would exceed the value of the patent to the manufacturer, so it would be possible to find an agreeable price. Of course, there would be great potential for government corruption.

[W]

Of course, there would be great potential for government corruption.

Not so! Assuming you are not being flippant, government never makes mistakes when it intervenes to cure market failure!

[Michael Dayne]

The number one priority of government is to provide security to the citizenry. Unfortunately, our government has proven itself to be ill-equipped to deal with the more dramatic challenges, such as terrorism and acts of God. (hey, against God whose gonna win anyway) One wonders how responsive Congress would be to prepare for a pandemic if the drug companies were lobbying the members toward that end. Or maybe it is just that those chickens are "overthere." It was telling to see the relatively small amount of concern that was expressed in the aftermath of the tsunami where so many tens of thousands of Asians died in contrast to the marked outrage over New Orleans and Katrina. I suppose the chickens have to come home to roost in a congressperson's district before politicians will take a threat seriously.

[W]

The number one priority of government is to provide security to the citizenry.

Why does that include acts of natural disaster and disease? Why not limit that to acts of violence between citizens and acts of war between nations? In other words, simply claiming that the market is failing isn't a justification for government intervention unless you have some underlying theory of government that explains how and why market failure is sufficient motivation for government to intervene. The government can always claim one set of market conditions is "failing" in comparison to another hypothetical set of market conditions that could plausibly be created by the "intervention". But I doubt any of us wants to live in a Marxist state.

[W]

Manufacturers don't swoop in, because there's a strong likelihood they won't be able to profit properly from their research.

Then why should the government step in? It isn't the job of the government to provide profits for corporations, is it?

[Still W]

It seems like an easy solution is for the government to offer a prize: 12 billion dollars, for example, to the first company to produce a vaccine for avian flu that meets the following criteria: x,y,z,a,b,v,c,d,e,f,g. The government, however, owns the patent, and after the prize is awarded, the market is immediately opened up to generics to copy the formula. (The government need not only offer one prize; it could offer multiple prizes for various strains of avian flu that have are "mutations of concern," based on lab testing.)

[Mike Petrik]

W presents one creative solution to the "market failure" caused by society's unwillingness to sufficiently recognize or reward intellectual property rights. What is interesting about it, however, is that the solution is actually conceptually more invasive than the traditional solution, which has been simply to properly recognize and enforce property rights. If a company invests billions of dollars with the hope of creating a marketable vaccine that it can sell for more billions of dollars, it will be pretty unhappy if the government decides that the vaccine's chemistry is not property that is owned by the company and instead may be copied by others who did not spend the billions on r&d. Indeed, any company that anticipates this treatment will likely refrain from making the necessary r&d investments. W seems to be saying that it would be a better solution for the government to effectively pay for the r&d in exchange for ownership of the property which it could then license at low rates in order to make the product inexpensive and therefore accessible. Leaving aside that the government (i.e., taxpayers) would almost certainly lose money in this venture, such a system requires that the government determine the market and need for various medicines. I have no doubt that such a system would be a ridiculously disasterous failure.

[W]

Mike Petrik: If a company invests billions of dollars with the hope of creating a marketable vaccine that it can sell for more billions of dollars, it will be pretty unhappy if the government decides that the vaccine's chemistry is not property that is owned by the company and instead may be copied by others who did not spend the billions on r&d. Indeed, any company that anticipates this treatment will likely refrain from making the necessary r&d investments.

That is only true if the government doesn't offer a large enough award, which is a bold and unfounded presumption to make! So long as the prize-award for a cure to a particular strain of avian flu is on cent more than the cost to produce it, a company has an incentive to research and develop. (I would note that the prize-model has been proven to work with private space flight.)

The italicized critique also ignores that universities have an interest in government money, and they have research facilities as well. As well as endowments. And, a prize is also an award and scientists like recognition and fame in addition to cash.

One could easily make the argument that my solution is less wasteful than two companies racing to be first to get a patent, a situation in which the expenses of the second-runner up are not recouped. My way, anyone who has invested in producing a cure for one strain of avian flu can, at minimal cost, simply convert those dollars into a cure for another, somewhat similar strain, and claim a prize that way (as I said there can be multiple prizes). By contrast, if you had a privately owned patent, similar strains would not be individually patentable: lawsuits over whether the second-runner up has infringed the patent-winner's patent and whether the patent is valid would clog the Federal Circuit; research and devlopment costs would skyrocket because of defensive takes on construing such research in patent specifications during patent prosecutions, all in an effort to game the claim construction review by the courts. My way eliminates such wasteful litigation and R&D work and reduces the taxpayer burden by removing the issue from the tax-funded courts and out of the grasp of value-depleting attorneys.

[W]

One cent, not "on cent".

[John Powers]

Not sure how Taiwan rates as a market failure. So if Roche said, "no I will not license Tamiflu to you, what happens"? Do Taiwan fighter-bombers attack their headquarters? Why shouldn't Taiwan negotiate in favor of its citizens? Who cares about Roche? They can face competition and negotiation like any other market player.

JBP

[nate]

public health has to be part of national defense these days. it is probably the bird flu and a number of other possible things (anthrax, etc). expect the unexpected...

i did a little reading recently in a book called "Molecular Biology made simple and fun", third edition, David P. Clark and Lonnie D. Russell.

on page 9, the authors make an interesting point. Prior to teh 1900s, the number of soldiers who died during military campaigns as a result of infection diseases spread by lack of hygiene was greater than the number killed by enemey action. In the 20th century, the numberf of humans killed more directly by other humans outnumbered those killed by bacteria.

[dean baker]

Anyone who supports patent monopolies cannot say they are opposed to government intervention -- patent monopolies are government intervention. They create all the distortions that economists expect to see from monopolies -- excessive marketing, bribery and corruption of politicians (to extend patent protection and to have the government buy patent protected drugs), concealed and distorted research findings, and counterfeit drugs. Honest economists don't ask about whether we want government intervention in the drug market, they ask what is the most efficient form. I have a short paper outlining the issues at http://www.cepr.net/publications/patents_what_are_the_issues_9-20.pdf .

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[Anonymous]

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