Alex Tabarrok - Prizes, Prices, and Public Goods

**Alex Tabarrok** (0:00)
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.

**Dwarkesh Patel** (0:12)
Okay, today I have the pleasure of speaking with Professor Alex Tabarrok, who's the Bartley J. Madden Chair of Economics at the Mercator 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 Professor, thank you for coming on the podcast.

**Alex Tabarrok** (0:31)
That was great to be here.

**Dwarkesh Patel** (0:33)
Awesome. Okay, so first I want to ask you about the Grand Innovation Prize. Can you explain what this is? And I'd like to ask you some more questions about it.

**Alex Tabarrok** (0:45)
Sure. I mean, the basic issue 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 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 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 vaccine manufacturer.
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 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 got to 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 vaccine, which meets a set of criteria. You know, it's effective at, you know, 60%, 70%, 70% as such and such safety criteria and so forth.
Or you could pay directly for manufacturing costs in order to get the firm to build the factory. You can say, okay, we're gonna pay some of your costs. And there's pluses and minuses, but the basic idea of a prize or advanced market commitment or advanced market 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.

**Dwarkesh Patel** (2:38)
Gotcha. And the incentive is even weaker because you can only sell somebody a vaccine once, if it works at least, right?
Okay, so I have a question about 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, there's a billion dollar price to making that vaccine, but they don't have the initial funding to get that manufacturing or even testing up to par. What do you do about that?

**Alex Tabarrok** (3:03)
Right, so there's a tricky set of trade-offs because on the one hand, the government really is not good at picking winners and losers. We know that from industrial policy and that holds just as well for vaccine policy. So that pushes you towards just having a prize where you just, all comers. And another advantage of that is we really don't know what kind of vaccine is gonna be the most successful. And there's a whole bunch of different types. There's the traditional live attenuated vaccine, a killed virus vaccine. There are some new vaccines using mRNA technology, some DNA vaccines. And maybe it's not gonna be a vaccine at all. Maybe it's a therapeutic, right? Which could serve the same kind of purpose. Or maybe there's some other innovation. And when you have a prize, you really are opening up the field to the crazy ones, to the ones who wouldn't necessarily get through the NIH committees.
And that's of course the classic story of the Longitude Prize, which was won not by Newton, but by this watchmaker, clockmaker.
However, we also then have the trade-off, which is the point that you mentioned, is that some firms may not have the capital. And for those firms, there's a greater argument for funding them upfront. And here, you know, there's no easy solution in a pandemic. I kind of think you want to go at all guns blazing, okay? You want to use almost all the tools that you have available to you. So what I've been working on this problem with Michael Kramer, Nobel Prize winner, who is kind of famous for the advanced market commitment for the pneumococcus vaccine, which probably saved 700,000 lives, was given to millions of children.