Externality, Amit Varma and Baby Doll

Solving for social distancing as a positive externality

Public health has a positive externality. By practising good hygiene, eating well and exercising, I am healthy and, therefore, non-infectious. This benefits you as my neighbour or someone who meets me often although this wasn’t why I was spending money and effort to keep myself healthy. In economics this benefit to you is called a positive externality. This positive externality to you (or the society) isn’t factored into the prices of my gym membership or the many hand sanitisers I buy. This is what is called a market failure. That is, since this ‘extra benefit’ can’t be priced into the products the producer will be somewhat less motivated to create these products. This failure can be sorted in various ways, one of which is government intervention.

In India a good example of such a government intervention for public health is the Swachh Bharat programme. No individual company or agency will be able to capture the social benefit of such a positive externality (though HUL did to some extent using their Lifebuoy campaign) so the government intervenes.

Social distancing is a way of maintaining public health in these times. The benefits of doing this accrue to you but more importantly also to the society. You bear the cost of social distancing – lack of social interactions, loss of pay (for daily wage earners) and general inconvenience – but these costs might be different for different people. It is possible the benefits to you might outweigh the direct costs. All good then and you stay at home. What if it doesn’t? Like in the case of a daily wage earner or a gig worker. To them the cost of social distancing is a livelihood problem against 1% of odds of contracting the virus. They might not choose social distancing. What’s the solution then?

Economist Ronald Coase offered a solution which states “when there are conflicting property rights, bargaining between the parties involved will lead to an efficient outcome so long as the transaction costs of doing the bargaining are negligible”. In human language this is what it means. A worker at a mall near your home could come to you and announce he won’t sit at home practising social distancing because it costs him too much. You obviously don’t like the sound of this so you would offer him Rs.200 daily to continue sitting at home. Coase said whenever such bargaining can happen at negligible costs and efforts and where the property rights are clearly defined, bargaining will lead to an efficient outcome. He will ask you to send Rs 200 daily and sit at home.

Clearly, this can’t be done at zero costs for the entire society since there just too many players involved and it is too difficult to figure out the bargains. So, the government has to intervene. A simple thing that the government can do is bargain at a macro level between the two parties, i.e. the regular employed workers and gig workers. It should lay out the cost it takes to keep the urban daily wage workers at their homes (should be lower than their regular salaries since they also benefit from social distancing) and it should tell the regular employees this cost has to be borne by them.  Else, these workers will be out on streets working and spreading infection.

A target for such a fund can be set with a short timeline. The government starts it with an initial corpus and then sends demands to tax-payers with income greater than Rs. 5 Lacs. The demands can be progressive in nature – higher income earners pay more. An average demand of 2% on such taxpayers can fetch about Rs. 10,000 crs. Throw in the initial government aid of Rs. 5,000 crs and you get a Rs. 15,000 crs corpus. For a 1.5 crs strong gig workforce, this would be a per capita aid of Rs. 10,000. Good enough to last two months, I guess

This can be done starting tomorrow. But tomorrow is janata curfew day. Let’s start on Monday then.

Libertarian nightmare

If you are a libertarian who uses incentives, Hayek and social choice theory in every other sentence (basically if you are Amit Varma), these are tough times. State is encroaching on individual territory big time. You can only watch and wail. Like Sahir once wrote in Mr. & Mrs. 55 – “meri duniya lut rahi thi aur main khamosh thaa”.

That kind of feeling.

As a semi-libertarian, I haven’t come across a proper libertarian argument against state encroachment during this Covid-19 crisis. The best I have heard from some US libertarians involves drawing vague comparisons between government response now and during WW2. The gist of the argument is unclear but let me try and articulate it. During WW2, the government didn’t use bailouts, tax breaks, loans etc. It did the reverse. It taxed more people to raise money. Apparently, taxpayers as a percentage of population went 4 to 40 or something. It floated war bonds and people bought them which the government could use to raise funds. So, it took money from people. Women went to work when the men went to war, so employment rose. Food was rationed. So on and so forth.

Based on this, the argument is there should be no bailouts, the dollar should slide and many other convolutions and convulsions later they end damning this whole relief package as something that will end the world. I had to re-read Road to Serfdom, yet I couldn’t make any sense of these ideas.

Because you see the fundamental difference between WW2 and today’s crisis is this. During WW2 the government was on a massive production expansion drive to make tanks, weapons, automobiles, GI Joe figurines etc. The GDP which includes government spend in its calculation, rose. That’s not what’s happening today. I have no idea how the comparison stands.

Maybe Amit Varma should do a 3-hour podcast with a libertarian in response to current crisis. I volunteer to research for questions.

Astrology, Coronavirus and Baby Doll

I have got plenty of Whatsapp forwards that suggest astrologers had predicted the current pandemic. Further, there’s some very specific prognosis on when this will end for the western world and for India. It will happen at different times because Rahu will move into Makar with a lag of a month or something. Rahu is always doing this sort of badmashi.

My question – These astrologers didn’t alert us about the pandemic which they knew was coming. Shouldn’t they be booked under the same IPC sections (188, 269 and 270) as Kanika “Baby Doll Main Sone Di” Kapoor?

Maybe, they have already taken anticipatory bail.

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