30 Sep 2014

Free riding on Ebola drugs?

Jente A writes:*

The WHO has declared that, of the almost 6,000 reported Ebola cases, death rates have exceeded 2,800. Predictions range between 20,000 and hundreds of thousands more deaths before the outbreak is under control. However, the free market has until now failed to provide an effective and largely available drug to fight Ebola.

The challenge that we are facing is to get these drugs developed and produced, and then to get them available on a large scale for patients in West Africa. In order to achieve this, pharmaceutical companies will probably need to invest more that $2 billion in research and development. The market on which these drugs would be sold, however, does not give a prospect of covering these costs and making profits. Ebola drugs will be sold for a relatively short period (during the epidemic) as compared to markets for other diseases, and West Africa is seen as a ‘poor market’. The price for which companies would have to sell the drug to make profit would be so high that most Ebola patients cannot afford to buy the drug.

This 'poor market' is the problem that we need to reconsider. Assuming that those who enjoy the benefits of the drug should also pay for it, which is ideally the case in a market economy, the core question that needs to be addressed is: who actually benefits from an Ebola drug?

Evaluating the benefit of Ebola drugs on a larger scale, it is not just the patient that gets cured from the disease who benefits. Ebola drugs will increase the general level of public health of the people of West Africa, and these people are the same people that provide the labour which companies make use of. The mining industry, for example, has a large interest in healthy employees and thus in the production and availability of Ebola drugs. However, as of now they are not considered part of the market for Ebola drugs. Multinationals working in West Africa will benefit from the production of the drug, but do not pay for the costs: they could ‘free-ride’ on the benefits of the drug if it would be available on the market.

So what would happen if companies would get involved in the Ebola market? Such an idea is not new, but has successfully been applied in South Africa in the 1980s. The South African Chamber of Mines funded a large-scale campaign to curtail the spread of HIV. This campaign proved to be very effective and benefited both the people and the mining companies that wanted healthy workers. Consider the possibility of applying this idea to the market for Ebola drugs: if multinational companies would become part of the market and invest in the provision of these drugs for their employees, there would be more buyers able to pay the market price established on the free market. Pharmaceutical companies could then increase their sales on the market and it becomes profitable for them to start developing and producing the drug.

This is, of course, easier said than done. Companies will need to be convinced that their investment in the drug will eventually benefit them (which might just be a matter of time since share prices of heavily exposed companies have already started to plunge). The costs of investing in Ebola drugs are considerably lower than the potential costs that these companies are facing due to a damaged economy. The damage to the global economy of the SARS outbreak in 2003, with ‘only’ 800 deaths, was approximately $50 billion. Consider the damage that we are facing if the death rates indeed reach hundreds of thousands.

Bottom Line: The challenge that we are facing in the fight against Ebola is to get all those with interest in an Ebola drug involved in the market. This not only includes the patients, but possibly the whole global economy, starting with those companies working with the people of West Africa.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

1 comment:

Rob said...

I agree on fact that health crises in developing countries do not get adequate attention and that this is due to a lack of incentive to invest in such underdeveloped 'poor' markets.
However, I think that the chance is rather small that multinational organizations will gain any benefit from investing in developing a cure for Ebola. Firstly in the example of HIV in South Africa you might have to consider that HIV is a disease that has very different socio-economic effects. If some unskilled mine workers in one of the affected countries would be infected he or she would die in such a short time span that the cost for the employing multinational would only be to hire new employees. And since an HIV-infected person will live for much longer the overall negative economic impact will be higher. For example, the economic burden as a result of Ebola infection for a family is lower than with HIV because with the latter, this family member has to be taken care of for a longer period of time while remaining unproductive.
I also see no incentive for these multinationals to invest in a cure because of the overall economic damage that an Ebola outbreak would result in. This is mainly because of the uncertainty of whether a cure will be developed timely in order to actually prevent the damage. It is also questionable whether large investments would really outweigh the cost for a particular company since the costs are likely to be spread over the whole economy of which the large majority will be free-riding on your investment.
Although I wish there would be more of an incentive for large multinational corporations to invest in developing a cure for Ebola I believe it is not there. This is due to the collective nature of the burden and as a result of too great a number of free riders.

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