Let’s try to make one federal budget decision. Who should receive the meningococcal vaccine?
Pharmaceutical companies need profits. Then they have more money for R&D for new drugs that can save lives, they can pay dividends to elderly shareholders who need the money and to younger families for their college savings. The research for the vaccine might have been very expensive. So, they might decide to charge $189 per dose.
Through programs such as Medicaid and Medicare, government pays for vaccinations. Stockholder owned insurance companies also pay for vaccinations. With millions of people getting the vaccine, it could cost $1 billion. Consequently, people might say the $189 for the meningococcal vaccine is too expensive.
Statisticians tell us that several thousand people get the disease annually. However, a headline about a meningitis outbreak generates considerable fear.
Finally, the national debt is soaring. More spent in one area means less elsewhere. Or it could eventually mean bond defaults that would place the U.S. financial system in disarray.
So, how to decide?
In the Department of Health and Human Services, at the US Centers for Disease Control and Prevention, the ACIP (Advisory Committee on Immunization Practices) decides. Typically, whatever they recommend, the government and private insurers pay for.
In 2005, the ACIP placed the meningococcal vaccine on their recommended list for adolescents. They knew, though, that the cost was $189 a shot, and the yearly government expense, $387 million. The benefit? Preventing 23 deaths and illness for several thousand. Then, during 2010, when they concluded a booster shot, doubling cost, would also be needed for most recipients, they decided again to recommend it. They said it was a tough decision.
Looking at the ACIP website, you will see all of the vaccines they recommend for every age group.
The Economic Lesson
A positive externality is the benefit enjoyed by a third party who has not participated in a contract or agreement between others. It could be called a spillover.
Vaccines create positive externalities because their recipients do not spread the disease against which they have immunized.
An Economic Question: If you were a member of the ACIP, explain why you would have been for or against recommending the meningococcal vaccine.