Optimal Vaccine Subsidies for Endemic and Epidemic Diseases
Vaccines exert a positive externality, reducing spread of disease from the consumer to others, providing a rationale for subsidies. We study how optimal subsidies vary with disease characteristics by integrating a standard epidemiological model into a vaccine market with rational economic agents. In the steady-state equilibrium for an endemic disease, across market structures ranging from competition to monopoly, the marginal externality and optimal subsidy are non-monotonic in disease infectiousness, peaking for diseases that spread quickly but not so quickly as to drive all consumers to become vaccinated.
Motivated by the Covid-19 pandemic, we adapt the analysis to study a vaccine campaign introduced at a point in time against an emerging epidemic. While the nonmonotonic pattern of the optimal subsidy persists, new findings emerge. Universal vaccination with a perfectly effective vaccine becomes a viable firm strategy: the marginal consumer is still willing to pay since those infected before vaccine rollout remain a source of transmission. We derive a simple condition under which vaccination exhibits increasing social returns, providing an argument for concentrating a capacity-constrained campaign in few regions. We discuss a variety of extensions and calibrations of the results to vaccines and other mitigation measures targeting existing diseases.
The authors are grateful for helpful comments from Witold Więcek and seminar participants in the Harvard Economics Department, Yale School of Medicine, the “Infectious Diseases in Poor Countries and the Social Sciences” conference at Cornell University, the DIMACS “Game Theoretic Approaches to Epidemiology and Ecology” workshop at Rutgers University, the “Economics of the Pharmaceutical Industry” roundtable at the Federal Trade Commission’s Bureau of Economics, the U.S. National Institutes of Health “Models of Infectious Disease Agent” study group at the Hutchinson Cancer Research Center in Seattle, the American Economic Association “Economics of Infectious Disease” session, and the Health and Pandemics (HELP!) Economics Working Group “Covid-19 and Vaccines” workshop. Maya Durvasula, Nishi Jain, Amrita Misha, Frank Schilbach, and Alfian Tjandra provided excellent research assistance. Williams gratefully acknowledges financial support from NIA grant number T32-AG000186 to the NBER. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.