Alex Tabarrok - Prizes, Prices, and Public Goods

Look, I want a small government. But I want a government to be able to do what it's supposed to do at the time it's supposed to do it.

(instrumental music) Okay. Today, I have the pleasure of speaking with Professor Alex Tabarrok, who's the Bartley J. Madden Chair of Economics at the Mercatus Center, and a professor of economics at George Mason University, and of course, he's the co-author of the popular Marginal Revolution blog with Professor Tyler Cowen, who I've also had the pleasure of talking on with the podcast. So, uh, Professor, thank you for coming on the podcast.

Yeah. It's great to be here.

Awesome. Okay, so the... Uh, first, I want to ask you about, uh, the Grand Innovation Prize. Can you explain what this is? And I'd like to ask you some more questions about it.

Sure. I mean, the basic issue is, is that clearly speed really matters at this point in time in the midst of the pandemic. We're already been too slow. We've been behind the virus every single step of the way. So we want to find a way of, uh, speeding up the incentives to produce a vaccine or a diagnostic or a therapeutic. And you might say, "Well, you know, don't the companies, for example, already have an incentive to, uh, be quick?" And to some extent they do, but not as much as we would like from social incentives. So think, for example, about a, uh, vaccine manufacturer. Uh, typically, most vaccines fail. Right? They're hard to produce, they're complex, and most of them fail. And what this means is that a vaccine manufacturer, they're not gonna be willing to build a factory, to ramp up a factory, to get the doses flowing, right, until the vaccine has been proven safe and effective and i- it's gonna be approved. Okay? So they're not gonna start moving really until the vaccine is approved. So if you want them to move faster, you've gotta give them bigger incentives, and there's a variety of ways of doing that. One is to have like a big prize, you know, a billion dollars to the first, uh, vaccine which meets a set of criteria, you know, it's effective at, you know, 60%, 70%, has such and such safety criteria and so forth. Or, um, you could, uh, pay directly, um, for, uh, manufacturing costs. In order to, uh, get the... a firm to build the factory, you can say, "Okay, we're gonna, uh, pay some of your costs." And there's pluses and minuses, but the basic idea of a prize or advance market commitment or advance market pursh- purchase or paying for at-risk capacity is the firms don't have as strong an incentive to ramp up the vaccine quickly as we would like, so we wanna give them some extra juice.

Gotcha. And then the- the incentive is even weaker because you can only sell somebody a vaccine once, if it works at least, right? Uh, yeah. Um, okay. So I- I have a question about, um, how- how do you get money to the people... I guess you could give grants for manufacturing, but if somebody has a great idea for creating a vaccine, they... there's a billion dollar prize for making that vaccine, uh, but they don't have the initial funding to, you know, get that manufacturing or even testing up to par. Um, what do you do about that?