On paying the hesitant to get themselves vaccinated
Ronald Coase, the English Nobel laureate economist, won the award for his work explaining how well-defined property rights were needed to resolve the problem of externalities and other types of market failure. Externalities exist when social costs differ from private costs, or when social benefits differ from private benefits. In most market interactions, there is no difference between social cost (benefits) and private costs (benefits). For example, if you or I were to purchase a ticket to a Knicks game, or purchase a new car, we are the private beneficiary, and that benefit is also equal to the social benefit. But what happens when my actions cause harm to someone else, and it is difficult if not impossible for them to be compensated by me for the harm I have caused them? When these types of interactions occur, we have the presence of externalities and market failure.
A common example of externalities is the case of a factory upstream polluting the river that impacts recreational or commercial fishers, swimmers, boaters and nature lovers downstream. Unless the government steps in, it is unlikely that the polluting factory will ever compensate those harmed by its actions. Economic efficiency and equity call for government intervention to solve the problem of market failure.
Vaccine hesitancy falls into the category of market failure because the inaction of vaccine-hesitant Americans is imposing costs on Americans who have taken the vaccine. If hesitancy only impacted the hesitant, their decision would be none of anybody else’s business. But that is not the case. Their actions affect them and everybody else.
In this debate about vaccine hesitancy and the need to achieve herd immunity, it has not been widely discussed how the divergence between the social cost of hesitancy and the private cost of hesitancy can only be solved with government intervention. Science tells us that the vaccine hesitant are not only risking their health and their lives, but they are also risking the lives of strangers who have taken the vaccine and others who also might be hesitant. This is a classic case of market failure caused by an externality.
Before discussing the economic solution to this problem, it is important to estimate the cost of not resolving the problem vaccine hesitancy.
According to the CDC, there have been 32.6 million cases of COVID-19 and 580,073 deaths as of May 12. The vaccine has had tremendous success in reducing cases — the most recent seven-day average of hospitalizations of confirmed COVID-19 cases is 30,718. This is down significantly from the 123,845 seven-day average earlier this year (Jan. 5 through 12). We have come a long way.
It is estimated that the average cost of hospitalizing a COVID-19 patient is about $60,000. If the current rate of hospitalizations stays constant for the next 100 days, there will be another 3 million hospital days. According to researchers at the Journal Healthcare Finance, the total cost of hospitalization so far has topped $584 billion. The average costs per day of a hospitalized COVID-19 patient is approximately $15,000. The cost of hospitalizing Americans over the next 100 days could exceed $45 billion. Who will pay for this? We will — the vaccinated and the unvaccinated.
If we could reduce the rate of hospitalization (and deaths) by 50 percent, we could save $22.5 billion. We might be able to do that by increasing the vaccinations so that the vaccination rate increases to over 80 percent — the percentage epidemiologists suggest is necessary to achieve herd immunity. The CDC currently estimates that 59 percent of American adults have had at least one shot, and 45 percent of adults are fully vaccinated. We still have a long way to go. And now that most of the eager Americans have gotten vaccinated, the hard work of getting the rest fully vaccinated begins.
There are still over 142 million American adults who are not fully vaccinated. To get to the 80 percent vaccination rate for adult Americans, we need to vaccinate another 90 million American adults.
If herd immunity could eliminate hospitalizations and we can compensate the unvaccinated to get them to change their minds, we should be willing to pay each unvaccinated American adult $500 to get vaccinated. Of course, we would hope that the remaining unvaccinated Americans would voluntarily get vaccinated without a financial incentive, but economic theory suggests we should be indifferent between paying the unvaccinated $500 or just pay for the hospitalization of those who will continue to get sick. We are going to pay one way or the other.
The solutions to market failures of this type are to pay those who create more social benefit than private benefit, or to charge those who create more social cost than private cost. In the case of vaccine hesitancy, charging the hesitant might work, but it is easier to catch flies with honey than vinegar. We should consider paying the vaccine hesitant to get the shot; in the long run it will cost us less in financial resources and save lives.
My suggestion is we offer $100 to unvaccinated American adults to get vaccinated and see if that does the trick. Unless we significantly increase vaccination rates, too many of our neighbors, friends and family members will end up in hospitals — or worse. I think Professor Coase would agree.