Help Me Understand This, Somebody…

A fellow Puneri citizen sent out this tweet yesterday:

It was hard not to be snarky, and I didn’t even bother trying to resist:

But in my day job, I try to be an economist, and so I have questions. Just two of them, and they’re fairly simple ones. Here they are:

  1. He (or SII) was free to set the price, correct? Free market economics: let the seller decide the price, and let the buyer decide if she wants to buy at that price.


    So the price now stands reduced by a whopping 25%. Does that mean that it was set too high in the first place?


    That is, let us assume that SII is able to increase capacity expansion at a price of 300 per dose. Also assume that it can make a normal or “super” profit at this price – then was 400 not too high?


    If we assume that he was going to earn an extra 100 rupees per vaccine sold, and that he was going to sell say 200 million vaccines to the states, that’s 200 million into 100 rupees.1

    I don’t want to do the math, but were we ok with at least that much “extra” money going into the Poonawalla coffers until yesterday?

    If yes, why?


  2. Unless, of course, that was not the case, and capacity expansion will suffer at a price of 300. A raise in the minimum wage will mean switched-off air-conditioning, correct? Well, in that case, is it not our moral duty to ask him to take the price back up to 400? Because if the opportunity cost of his philanthropy is reduced capacity expansion, isn’t that worse?

(By the way, all this is taking the assumption that SII “needs” the proceeds from the sale of this one vaccine alone to fund capacity expansion. That may or may not be true. And this also assumes that this is the only vaccine that SII will be producing and selling, which is obviously not true. Even in this “best-case” scenario, my questions hold up – if we do a full reckoning, they become even more important!)

If it is the first point above, us economists must explain why we think it is ok for those 100 rupees (per dose) to go into SII’s coffers.

If it is the latter, there ought to be a stream of op-eds beseeching Mr. Poonawalla to roll back his offer, for that would be truly philanthropic.

Which will it be?

And I know I said only two questions, but forgive me my greed, and let me ask one more: what is the definition of “transparent pricing”?

  1. Where do I get that number 200 million from? Who knows? I assumed that for the 960 million people in total who become/continue to be eligible on the 1st of May, he gets to sell only 200 million doses to the states. And yes, I am assuming only a single dose for these 200 million. Since nobody knows what the quantities are actually going to be, this is as reasonable an assumption as any other. If anything, this is a very conservative estimate. No?[]

The Vaccine Responsibility by K. Sujatha Rao

I and a friend have been exchanging messages about the idiocy that was the European Super League (or whatever the name was. I’m not even going to bother looking it up). He asked me if I would post anything here about the economics behind the league, either defending the idea or refuting it.

Here’s one paragraph from a previous post of mine that I would want to base that essay (if I ever write it) on:

When David Perell says that we have made the world cheaper, what I think he is saying is that we have figured out ways to cheapen the effort that we are willing to put into the act of consuming something. That something could be a meal, but it could also be extended to reading, viewing, or listening as well – and more besides.

https://econforeverybody.com/2021/03/08/maximizing_soul/

To me, the ESL is based on the assumption that a large number of us fans are willing to cheapen the effort that we are willing to put into the act of consuming football matches – that we are not looking to maximize soul. Thankfully, so far, that assumption seems to have been ever-so-slightly off the mark.1

Anyways, he wrote a post about it, and we’ve been sharing stuff about it on and off. I sent him one written by Jonathan Wilson, and he sent me this response: “I seem to have covered largely the same points with way less finesse.”

To which my response was, that is my middle name.


Now, I didn’t need to write any of that, and any half-decent editor would have lopped off that whole bit – and quite rightly too. But hey, this is my blog, I had fun writing it, and it was a welcome break from you-know-what.

But “I seem to have covered largely the same points with way less finesse” is all too applicable in my case when reading K. Sujatha Rao’s excellent article in the Indian Express today on India’s vaccination drive. It is worse in my case of course, because I haven’t even covered largely the same points, forget the finesse.

I won’t excerpt from it, because it deserves to be read in its entirety.

But I will reiterate (in my won words) points that I thought were especially crucial, and also list out some questions that I had after I finished reading it.

  1. The point about the utilization of the vaccines that will be procured by the Government of India (GoI) is really a request for clearer communication. You simply cannot overstate the importance of clear communication.
  2. If SII has received grants from GAVI and from the Central government, would a publicly available dashboard about capacity, supply chain bottlenecks, vaccine allocation by states/countries and specific timelines for capacity expansion be possible? I’m not trying to be snarky, I am genuinely asking. What are the reasons against such a dashboard being made publicly available?
  3. I’ll ask again: Imagine a good with large positive externalities. Let’s call this good a vaccine. Let’s say that the supply of these vaccines is going to be tight. Let’s say that demand is very inelastic. Would you recommend fragmenting total market demand into smaller constituent curves? If yes, why?
    K. Sujatha Rao makes the legal argument in her article, and then makes the economic argument. Read both (and again, not being snarky), please tell me why we are choosing to do what we are doing – in this year of all years, and for this good of all goods.
  4. She speaks of halving the estimated cost of INR 60,000 crores by invoking compulsory licensing and expanding production through the 18 manufacturing facilities in India. These must be back of the envelope calculations, obviously. But if anybody reading this has information on how one might create such an estimate (and an estimate of how much production will go up by via this route), please let me know.

Please, do read the article.

  1. Sarcasm alert: the evil idiots who dreamt up that monstrosity have gotten exactly what they deserved. Not enough of it, if you ask me.[]

Some Really Simple Questions about the Supply of Vaccines

  1. Do we have enough vaccines for India to roll out doses to everybody who is 18+?
    No.

  2. Will increasing the price at which these vaccines are purchased increase the supply?

    Yes. I teach this for a living, as do thousands of economists the world over, and there is no way our answer to this question ought to be anything except a resounding “Yes”.

    An increase in the price at which we’re willing to buy a good will increase the supply of that good.

  3. Is that the only way to increase the supply of these vaccines?

    No. Murali Neelakantan and I outlined some of the possible ways in this article. A fuller explanation is available here, but it is behind a paywall, alas.

  4. But… aren’t we suggesting nationalization, or something like that? It doesn’t sound free-market-ish.

    And indeed it isn’t. Price based market mechanisms are, under normal circumstances, infinitely preferably to other mechanisms. I strongly disagree with anybody who states otherwise.

    Growth maximization above all, subject to the right to live and climate considerations is a philosophy that is hard to argue against. And growth maximization happens best with market based price mechanisms.

    But I also strongly disagree with people who will say that these are normal circumstances!

    And under these circumstances, I think it makes sense to ask if other options have the ability to increase supply. Especially in the short run. A 350,000 daily caseload number with a CFR of even 0.1% is reason enough for me.

    Put another way, if the opportunity cost of sticking to only market-based price mechanisms is lives lost because of insufficient vaccines, is it worth the trade-off?

    To me, no. This is that one year out of a hundred where you do what it takes, no matter what.

  5. So what do we do next?

    Run the numbers! If we adopt the solutions that have been outlined in the Scroll piece, how much does vaccine production go up by? And by when? If we find out that it goes up by only 1% against the baseline (do nothing) scenario, and that only after six months, then it is not worth it.
    But, on the other hand, if we find that it is possible to increase supply by 25% by the end of May as against the do-nothing scenario, then sign me up for this plan.
    Again, run the numbers.

  6. So have we run the numbers?

    As best as I can tell, no. There is no analysis that I can find online (published by the government or otherwise) that has run these scenarios.

    Running the numbers is complicated, I appreciate that. It is not just a simple question of saying “x” is the monthly capacity of plant “y”. There’s supply chain bottlenecks, efficiency considerations, learning curves, technology transfers and much more involved. But is developing this model necessary? For reasons answered in questions 1-5, I think so, yes.

  7. So why don’t I run the numbers?

    Why not indeed? But before I try, if any of you have…
    …any information about whether or not this has already been done by somebody
    …arguments for why this should not be done…
    Please, do let me know.

    Also, if any of you have any links that will be helpful in this analysis, please, do let me know.


It is difficult, this economic theorizing business

One of my favorite questions to ask in classes on introductory economics is this one:

“By a show of hands, how many of you have a BSNL sim-card?”

The answer is rarely more than five percent, if that, and my little stunt works every time. For obvious reasons, of course: even passionate defenders of the public sector often reveal their preference through action, if not always through their statements. Free markets work, the private provisioning of goods is demonstrably efficient and the price mechanism is a wonderful, wonderful thing.

Until, every now and then, when it is not.

April 2021 is one of those times.

And to make sure we could then produce those vaccines at scale, “X” brought up an idea that came from the Biomedical Advanced Research and Development Authority when Rick Bright was its director. The authority proposed subsidizing the construction of private manufacturing facilities as long as the government has the authority to take them over in times of pandemic.
If all of this sounds as if it’ll require a lot of government action, well, it will.

https://www.nytimes.com/2021/04/01/opinion/covid-vaccine.html

Pop quiz, particularly for those of you who follow economists online. Identify “X”.

“X” is, of course, that well known pro-government socialist, Alex Tabbarok.

Sarcasm alert: Prof. Tabbarok is as much of a pro-government socialist as Rahul Dravid is a goonda. But as with Rahul Dravid and goondagiri, so also with Alex Tabbarok:

“Ninety-nine years out of 100, I’m a libertarian,” Tabarrok said with a laugh. “But then there’s that one year out of 100.”

https://www.nytimes.com/2021/04/01/opinion/covid-vaccine.html

And it is that kind of a year, 2021 – for both Alex Tabbarok and Rahul Dravid. It is a year in which the role of the government is more important than perhaps ever before, given what is at stake: public health. Public health is, by definition, a public good:

And the role of the government in this case is to do all it can to ensure the provisioning of that public good – in this case, the vaccine.

Hold on to this thought, and we’ll come back to it.


Here’s a hypothetical scenario: a joint family is considering ordering in dinner this coming Saturday, and mutton biryani is the unanimous choice1.

The restaurant this family is considering ordering from will deliver a jumbo family pack (serves 8) for two thousand bucks. Single serves of the same dish are also available, at three hundred each. There are eight family members.

Should the family order a family pack, or single serves?

Here’s another (not so) hypothetical scenario: Until a couple of years ago, Holi celebrations in our housing society would always mean having the neighbourhood chaatwala set up shop in the lobby. Anybody and everybody who was here playing Holi was welcome to have as many plates of chaat as their hearts desired. No payment was involved, of course, because the payment was made in advance, in bulk.

Does this make sense, or would we be better off paying for each dish as we had ’em?

Hold on to this thought too, and we’ll come back to it.


Final thought experiment (I promise!): let’s say this chaatwala is the stuff of legend. Mindblowing panipuris, outstanding bhelpuri and tokri chaats that have the potential to rule the world. We would like to have this demi-god of chaat set up shop in our society, but so would ten other housing societies in our neighbourhood.

If you were this maestro of a chaatwala, which society would you choose to shower with your culinary blessings? The housing society with the cutest kids, or the kindest grandparents, or the prettiest flower-beds? Or the one with the most number of lived-in apartments – that is, the one that was likely to give you the most business?

And conversely, if you were part of the largest housing society in the area, and you and everybody else including the chaatwala knew this to be a fact, could you maybe get a bit of a discount on the deal? Would you, at the very least, want to try?


Can I cheat a little bit and include one final thought experiment? What if eating that chaat wasn’t just good for your palate? What if it also, somehow, conferred upon you the mystical, magical ability to not infect your neighbours with some disease – say, a virus?


Now let’s combine all of the above, and resort to econo-speak where the vaccines are concerned:

When faced with a largely inelastic supply curve for a good, fragmenting demand into separate constituents means you lose out on bargaining power. When the good in question is one with large positive externalities, procuring as much as possible as quickly as possible becomes a moral imperative. The best way to do that is to have the central government procure centrally, and that right away.

In fact, if it is a question of conferring those mystical, magical abilities upon as many citizens as quickly as possible, maybe the largest housing society the government should get that chaatwala to share the recipe with other chaatwalas in the market.

All housing societies should get as many plates of chaat as quickly as possible, but the negotiating should be left to just one extremely large entity. That negotiating should include potentially sharing the recipe for that delicious, life-saving chaat.

Or, to close the loop on the metaphors:

Every state should get as many vaccines as quickly as possible, but the negotiating should be left to the central government. That negotiation should include the possibility of sharing the patent for the vaccine (and more besides). And oh, remember that the truth lies somewhere in the middle. There is indeed a role for the private sector here: distribution and last mile delivery can and needs to be an all-hands-on-deck affair. Procurement? Not so much.

Is this a free-market solution? No.

Does a non-free-market solution stand a chance of being an optimum solution?

As Prof. Tabarrok points out, every hundred years or so, the answer is yes indeed.

Very much so.

  1. It’s a hypothetical scenario, so we’ll assume away Arrow’s Impossibility Theorem[]

Two Very Different Takes

Ajay Shah had what I thought was a pretty good piece in the Business Standard the other day (h/t Murali Neelakantan). While the headline of the piece was “Price controls for vaccines?1, it was essentially about the best way to ensure delivery of the vaccine to every nook and cranny of India.

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.

https://www.business-standard.com/article/opinion/price-controls-for-vaccines-121030700896_1.html

And to make his point, he used the example of demat securities settlement.2

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.

https://www.business-standard.com/article/opinion/price-controls-for-vaccines-121030700896_1.html

Ajay Shah makes the point that this is how markets can work when allowed to, and uses this analogy to make the argument that governments should not cap the prices of vaccines (and their delivery).

So far, from an economists point of view, so good. Markets work when allowed to, and all is well with the world. But Gulzar Natarajan has a different point of view:

This is deceptive and an extremely misleading story. In fact it is shocking that this comparison could even be made. As I shall explain in brief, this extrapolation from the world of demat shares settlement to that of administration of vaccines is all logic with little understanding of the differences between the respective markets.

https://gulzar05.blogspot.com/2021/03/markets-are-not-solution-to-vaccine.html

He raises the following points:

  1. The tendency of those in rural areas to defer medical visits because of poverty/affordability concerns
  2. Share markets are about the luxury of choice. Vaccination isn’t.
  3. Vaccinations lead to large positive externalities3
  4. Market allocation in the face of deep inequality is problematic
  5. Private health clinics may not follow all follow-up protocols.4
  6. Effective markets need strong state capacity. Without it, price gouging, sub-standard medical equipment, fake vaccines are all more than possible.

Read the whole post, please, as usual. Towards the end, he makes the point that it is not about one or the other:

None of this is to say private market should not be part of the vaccine drive. A low enough price should be fixed and vaccines administered privately too. But coverage of the vast majority of Indians in remote and rural areas will have to be through the public system, as has always been the case with all other vaccines.

https://gulzar05.blogspot.com/2021/03/markets-are-not-solution-to-vaccine.html

None of this is meant to be a criticism of either Ajay Shah or Gulzar Natarajan, of course. The point of this post, instead, is to show you three things:

  1. “How might the author be wrong?” is a useful way to read everything.5
  2. The truth lies somewhere in the middle is a thumb-rule that fits almost everything. Especially Indian things. While there are disagreements that I have with Gulzar Natarajan’s piece, he is making the point that ignoring government (or public) delivery of vaccines is fraught with risk – and I agree.
  3. The guy who writes these posts (me, that is) himself didn’t focus enough on pts. 1 and 2 when reading Ajay Shah’s op-ed. Note to self: work harder!
  1. This will be behind a paywall, sorry[]
  2. Don’t worry if you don’t know what this means. Run a simple Google search and plunge right in to the first three articles. You’ll get a reasonably clear idea.[]
  3. I’m quoting him, ok?![]
  4. Of course, neither may public hospitals![]
  5. It’s also a useful way to attend classes[]