The manufacturing and development of the Covid-19 vaccine is a risky task as it entails a lot of resources and lengthy phased trial periods. The most significant risk that manufacturers experience is called the productivity gap. It is whereby invested resources do not add up to the cost of the expected outcome. An increased period widens the productivity gap because the vacine undergoes more research and high development costs.
In the case of direct support agreements, the government bears all the costs since there is always a chance of failure due to several variations in complexity. However, if the vaccine development is a success, the government’s risk is justified (“Risk versus uncertainty, or Mr. Slate versus great-aunt Matilda,” n.d.). Though the stakes are high, the government would benefit from it since economies would start to open, reducing the rate of recession, and the health sector would benefit the most since they suffered the most since the beginning of the Covid-19 pandemic.
If a company refuses to take grants and chooses the method of advanced purchase agreements that stipulates that government will purchase a specified number of vaccines after the manufacturing. Then it is most likely that the company would incur most losses in the event of a failure. This advanced purchase method is more cost effective since the government buys already manufactured goods. The risk of failure is high, which could directly impact the price of the vaccine leading to an increased price.
The US government and Pfizer agreed to an advanced purchase method though the details at the time were not Fully disclosed. The deal did not include the price per individual vaccine, the amount of cash paid upfront, and the company obtained full ownership of the vaccine through patent rights.
Reference
Risk versus uncertainty, or Mr. Slate versus great-aunt Matilda. (n.d.). Econlib.Org.