Wednesday, October 13, 2010: 11:55 AM
This paper extends previous work to show how variations in the effectiveness of vaccines affect both their demand and supply. Individuals’ willingness to pay depends upon their probability of infection (in the absence of vaccination), the costs of infection, the effectiveness of the vaccine in preventing illness, the probability and magnitude of side effects of vaccination, and the degree of risk aversion. A standard epidemiological model (the Susceptible-Infectious-Removed or SIR model) is used to show how probabilities of infection vary with the number of people vaccinated and efficacy of the vaccine. Results from the model are combined with the analysis of individuals’ willingness to pay for vaccination to examine the properties of the market demand for vaccination using influenza and mumps as examples and to analyze the socially optimal level of vaccination, the perfectly competitive outcome, and the price and output decisions of a monopoly producer of mumps vaccine.
The analysis yields several interesting findings First, the demand for vaccine by individuals who are less risk averse can exceed the demand by more risk averse individuals. Second, the market demand for a less effective vaccine can exceed the demand for an more effective vaccine. Third, in the absence of government intervention, a monopolist will find it more profitable to produce a more effective vaccine rather than a less effective vaccine when the marginal costs of producing the two are identical. However, when there are price controls (as has been the case for many childhood vaccines in the United States since 1994) or sufficiently large subsidies for vaccine consumption or production, a monopolist may find it more profitable to produce a less effective vaccine or have less incentive to find a more effective vaccine.
The analysis yields several interesting findings First, the demand for vaccine by individuals who are less risk averse can exceed the demand by more risk averse individuals. Second, the market demand for a less effective vaccine can exceed the demand for an more effective vaccine. Third, in the absence of government intervention, a monopolist will find it more profitable to produce a more effective vaccine rather than a less effective vaccine when the marginal costs of producing the two are identical. However, when there are price controls (as has been the case for many childhood vaccines in the United States since 1994) or sufficiently large subsidies for vaccine consumption or production, a monopolist may find it more profitable to produce a less effective vaccine or have less incentive to find a more effective vaccine.