The world has witnessed an unprecedented race by the private sector to develop and produce Covid-19 vaccines. Since the outbreak of the pandemic, at least five different vaccines have proven effective against the virus. Vaccine development is a risk-intensive process. It requires substantial investments in pre-clinical research, human clinical trials, regulatory submissions and market creation, with relatively low likelihood of product success and market entry. So, what incentivised private pharmaceutical companies such as Pfizer, Moderna, AstraZeneca, Johnson & Johnson and Bharat Biotech to spend hundreds of millions of dollars in mobilising resources and capabilities for vaccine R&D? No doubt the desire to do good. But these companies also have afiduciary duty towards their investors and an equally important, if not more important, incentive for innovation is provided by potential profits from the sale of these vaccines to billions around the world. Profits are only possible if pharma companies are allowed to sell their vaccines at a price that covers not just the marginal cost of production, but also the significant initial costs incurred during R&D. This can only happen if companies are granted some monopoly power either through patent protection, where innovators have exclusive rights to market the vaccines they develop, or by regulation that limits generic drug manufacturers from reengineering the manufacturing process at lower costs of ownership and selling those generic equivalents at slightly above marginal costs of production. Yet, granting monopoly power to pharma firms, while providing incentives to innovate, allows a large number of people who could have obtained life-saving vaccines, especially in poorer countries, to suffer and perhaps die. Such monopoly power also hinders improvements and subsequent innovations if patentholders disallow that. This is the dilemma we currently face. In response to mounting pressure from Democrats and nearly 100 countries, Joe Biden waived patent protection for Covid vaccines being produced in the US. Angela Merkel opposed this move, warning that it would discourage production of important vaccines. Merkel is right. Monetary incentives for innovation are critical to stimulating and growing innovation. Economists have implicated the significant gap between private and social returns to research in limited development of vaccines for diseases like malaria and tuberculosis that plague developing countries. While waiving patent protection for the Covid vaccine, it is important to design an alternative system that rewards innovators for this critically important quest. Economists and intellectual property advocates, including Joseph Stiglitz, have long emphasised rewards paid by the government to innovators — such as prizes and purchase commitments — as an alternative to patents in spurring innovative activity. Virtues of the reward system include providing incentives to innovate without granting monopoly power over price, or nonoptimally restricting the use of essential innovations. A prize could compensate the innovator and then render the innovation open source so that it can be produced and distributed widely. What should be the size of the prize? Who should fund it? How should it be administered? In the 2006 paper, ‘Regulation of Natural Monopolies’, MIT economist Paul Joscow’s suggests that a lump sum prize to compensate for initial R&D costs, along with licensing fees for production paid by government and philanthropic organisations, would provide the right incentives. Further, vaccine R&D is a global public good. So, each country has the incentive to free-ride research financed by the governments of other countries. Governments (read: taxpayers) and philanthropic organisations must pay for the right outcome, with richer countries with greater willingness to pay contributing more towards R&D costs. In effect, richer countries can purchase vaccines at near-monopoly price they would have paid for their populations during the period of patent protection. Thereafter, they should distribute or sell these at near-marginal costs of production, or subsidise for poorer and more needy populations. At the same time, the underlying technologies could be open-sourced for anyone else to use, copy or modify, including the innovating company, so that the most efficient producers can produce it in large quantities. If there is more than one innovator, as is currently the case with Covid vaccines, an auction mechanism could be instituted that will facilitate price discovery through information aggregation about potential demand and costs of production. To encourage organisations to invest in cures for future public health crises, intrinsic motivation alone will not suffice. We must provide financial incentives for innovation, and keep financial incentives intact, even as we unshackle ourselves from its limitations by judicious use of public and philanthropic funding.