24 Sep 2014

Market Failure and the Ebola Virus Epidemic

Margot M writes:*

According to a recent update from the World Health Organization (WHO) the Ebola Virus outbreak, believed to have originated in Guinea in December of last year, has infected more than 5,800 people and claimed 2,793 lives so far. With a death rate of 70%, WHO researchers issued a dire new forecast this week, one that anticipates 20,000 deaths by November (10,000 in Liberia alone). The urgency of the issue has been clear for months now, but it has only recently begun to pick up traction and illicit international response in which aid commitments have been stepped up. Why has it taken this long? How is there still no effective and widely accessible vaccine for Ebola? Well, it probably has something to do with market failure.

Image from The Economist
Prof. Adrian Hill, an Oxford professor leading research into a candidate vaccine for Ebola attributes three main reasons to why big pharmaceutical companies like GlaxoSmithKline, Novartis or Pfizer have been reluctant to produce an effective vaccine as of yet: firstly, because of the nature of the outbreak; secondly the estimated number of people to become affected was thought until recently to be quite small; and finally, that the affected people are in some of the poorest countries essentially unable to afford a new vaccine. For an “orphan disease” affecting the impoverished in poor countries, “there is no market”.

Despite a widespread tone of moral indignation towards “Big Pharma” companies, which have essentially monopolized the commercial vaccine supply, the fact remains that there is a lack of profitability from a big market and thus a lack of incentive to produce for those who need it most. This clearly constitutes a market failure whereby the market underprovides a good, which has the potential for vast public benefits. The economic incentives (profits) for the production of these vaccines fall short of public health needs. Yet, if there were to be intervention in the market, which would encourage producers to supply closer to the socially optimal level, demand would be met and the epidemic could be contained. The figure below illustrates the forecast of three different scenarios as predicted by a research team at Columbia University further elucidating the urgency of the matter even in a best-case scenario:

The private benefit of getting the vaccine would be less than the marginal social or public benefit and thus carries with it positive spillover, which goes beyond the obvious health benefits. Said public benefit would not only consist of the lives saved throughout the region by the containment of the virus, but also the prevention of complete economic downturn and further hardship. Strict trade and travel restrictions have already dampened West African economies, but if Ebola is not controlled soon, the World Bank estimates that the long-term effects will be crippling. At its current rate, the virus would cause Liberia’s economy to contract by 4.9% and reduce economic growth in Sierra Leone from 11% to approximately 2%.

It is disillusioning to see that the moral imperative to help those suffering is far weaker than that of the profit incentive. It has been almost 40 years since Ebola was discovered in 1976, yet there is still no cure, despite its medical feasibility. The alignment of incentives is crucial in order to correct for the shortage of a widely accessible and effective drug in the market.

Bottom Line: The Ebola virus has spun out of control and now, the necessity of multi-lateral action is more pressing than ever.

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


Ties Rijcken said...

why is there no UN fund for these matters, similar to emergency famine and refugee aid?

Unknown said...

Some quick back-of-the envelope math says that the benefits would exceed the costs here. According Eli Lily's blog (http://www.forbes.com/sites/matthewherper/2012/02/10/the-truly-staggering-cost-of-inventing-new-drugs/), which is likely to overstate the cost, the average cost to develop a new drug is ~$1.3 billion. Even if you take a low value of a statistical life of $5 million and multiply that by the low mortality scenario, you still get $23.7 in gross benefits. That doesn't include the morbidity costs that the disease imposes either.

Jay said...

I think you are describing a version of the Trolley Problem rather than a market failure. WHO officials made decisions years ago with imperfect knowledge, but without other evidence we should assume they were trying to save five workers rather than one when they moved the switch.

Economics involves the allocation of scarce resources. Tradeoffs must be made.

Life is complicated and not all resource allocation decisions are correct when examined after the fact. (Hindsight is 20-20.)

Drug development is time consuming and uncertain. How many resources, and when would have been required to combat this outbreak of Ebola? Resources for fighting Ebola always compete against other uses, say fighting malaria.

Further, healthcare and drug development are highly regulated activities. They exist in a mixed market, and not a free market. We may have a regulatory failure rather than a market failure.

Bottom Line: Even when there appear to be profitable opportunities to exploit (from a social point of view) we may still be resource constrained.

Menno said...

I agree with Jay. A couple of months ago, Ebola was one of 100 diseases which *might* pose a risk to the world. (Given that Ebola only spreads through physical contact with blood or feces, it is even relatively easy to control compared to other dangerous diseases.) Is it 'market failure' that companies decided to invest their resources elsewhere?

Both private and public institutions might need better tools to estimate the probability of a particular virus breaking out. If it came out that an Ebola outbreak was relatively likely, the expected return on investment on a vaccine would be greater and companies might have invested.

What Is the Ebola Virus? said...

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Check it out: www.BioMedicalWasteSolutions.com/What-Is-Ebola/

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