Home » Biosecurity » Ebola and Market Failure

Ebola and Market Failure

Sign up to the Barefoot Economist’s Newsletter

© Barefoot Economic Services

All content on this website (unless otherwise specified) is copyright of Barefoot Economic Services. Please acknowledge any content used in your work appropriately. Thank you for your consideration.

You have probably heard about the deadly progress of the Ebola virus in West Africa. It is spreading at an alarming rate and does not appear to have any cure. To make matters worse, Ebola has a high fatality rate of 70% according to the most rigorous statistical studies. So far, it has claimed over 2000 lives and has now spread into Africa’s most populous nation of Nigeria. There may be unconfirmed reports that Ebola has found its way into Australia. According to the Oxford University professor, Adrian Hill, a vaccine is “doable” but ‘Big Pharma’ has not developed a vaccine because there was no business case. This situation sounds like a classic case of market failure.

According to Prof. Hill, ‘Big Pharma’ (i.e. GlaxoSmithKline, Sanofi, Merck and Pfizer) have not produced a vaccine because:

“…[F]irst because of the nature of the outbreak; second, the number of people likely to be affected was, until now, thought to be very small; and third, the fact that the people affected are in some of the poorest countries in the world and can’t afford to pay for a new vaccine.”

In economics, a market failure is where the market produces less than the theoretical perfectly competitive outcome. In the case of pharmaceuticals, a perfectly competitive outcome is unlikely to be achieved because of the small number of companies that dominate the global pharmaceuticals market. Furthermore, there are two broad forms of barriers to entry: sunk costs and patent protection. Sunk costs are costs that cannot be recovered. In the case of pharmaceuticals. large investments in research and development effort and infrastructure is needed in order to compete in the first place. This effectively excludes small competitors from being able to compete with Big Pharma. Patent protection is conferred by governments provided it can be shown that the product is new and original. This effectively provides a pharmaceutical company a monopolistic position for a specific product for a defined period. Even with all these protections, Big Pharma did not find it attractive to produce an Ebola vaccine despite it being technically more achievable than tuberculosis, HIV or malaria.

It appears that Prof. Hill’s assertion of market failure is correct. If we accept this, what lessons can governments learn from this sorry episode? It appears that if a government is concerned about Ebola spreading into their country, pro-active action is required to prepare for it. One of the reasons that Ebola has been so deadly is because of the lack of preparation by the governments of Guinea, Liberia, Sierra Leone and now Nigeria. Partly, because there never has been an Ebola outbreak in West Africa but also because of the poor state of their health systems. Preparation and prevention is key to limiting the economic cost of a biosecurity outbreak because the casualties and economic disruption are lower the shorter the outbreak. Clearly, Ebola is now a clear and present danger to African countries and they now have time to prepare to avoid the same fate of Guinea, Liberia and Sierra Leone.

So how can they prepare if they can’t buy the vaccines from the market? Maybe, they can learn from Australia’s preparations for Avian Influenza. The Australian government has prepared for avian influenza in two ways. First, by building up an anti-viral stockpile. Second, by contracting CSL Ltd (an Australian pharmaceutical company) and Sanofi to produce vaccines in the event of an avian influenza pandemic in Australia. Similar preparations could help African countries prepare for Ebola.

What could these preparations look like? Probably the most important is to improve the health care system to be able to cope with a sudden surge of patients. This would involve, at the very least improving the hygiene levels at hospitals and clinics. In terms of developing vaccines, this would probably require cooperation between African countries, donor governments and international health institutions (e.g. the World Health Organisation) to contract pharmaceutical companies. How to obtain cooperation from Big Pharma would probably require a combination of carrot and stick. Offer generous financial terms (funded maybe by the World Bank and donor governments). As a stick, the South African example of reducing patent protection for pharmaceuticals could be a credible threat to bring Big Pharma to the table, particularly if there is multilateral action.

Multilateral action would appear to be the key for African countries to obtain cooperation with Big Pharma. This is more difficult than unilateral action. However, given the potentially catastrophic damage that Ebola could inflict, and the dominant position of Big Pharma, multilateral action would appear to be a necessity for African countries to effectively prepare for Ebola. Unfortunately, skilful coalition-building is another form of market failure that requires government intervention.