Why economics tells us we should listen to the government’s advice

Dr Alex Dickson, Reader in Economics, University of Strathclyde

OK folks, so this is why people should follow the Government’s advice on ‘social distancing’ in light of the spread of Covid-19.

In this blog, I’ll set out why economic theory tells us to listen carefully to what the government is telling us.

Typically, when we decide whether or not to do something, we weigh up the benefits and costs of doing it, and if the benefits outweigh the costs, we go ahead and do it.

The problem is, we only think about the costs of our decision on ourselves. Very often, our actions have negative consequences for other people as well. Economists call these consequences ‘negative externalities’.

As an example, suppose a driver is considering whether or not to speed. There are benefits to driving fast (they get to where they want to go quicker), but there are also costs: there is a chance they will damage their car, and a smaller chance they will damage themselves. The driver will weigh up the benefits against these costs and make their decision. But there are also potential consequences for other road users: there is a small chance an accident might involve another driver or a pedestrian that may result in serious injury or death. For many drivers, these potential consequences for others will not be taken into account as much, if at all, when making the decision of whether or not to speed: drivers don’t fully ‘internalise’ the negative externalities they generate. As such, drivers would speed too much because they underestimate the costs. Laws and penalties therefore exist to bring into drivers’ minds an explicit cost of speeding when they are making their decisions.

Back to the point: Covid-19 has the characteristics that it spreads very easily, and it can be passed on before symptoms present. For most people it is reported to be harmless involving mild flu-like symptoms, but for a significant minority of the population the chance of death is high.

Let’s now consider a story. Andrew (who is a healthy 30-something with no symptoms) is facing a decision of whether to go round to his mate Richard’s house with a few pals for a beer now that they can’t go to the pub (Richard is also a healthy 30-something). Should he go? He has to weigh up the benefits and the costs. Usually this is a no brainer, but there is more to think about in the presence of Covid-19. There is a chance that Richard will have it, and there is also a chance that his other pals might have it. But hey, the symptoms are mild for young and health people, so if Andrew gets it, no biggie. Andrew might also consider that he might have it, and he might care enough about Richard that he accounts for the fact there is a chance Richard will get it. But hey, Richard is young and healthy, so no biggie. Seems like Andrew is probably going to decide to go, and he did.

But wait a minute…we live in a highly connected world. Suppose Andrew did have it (unknowingly, before presenting with symptoms). Given the rate of transmission, it is highly likely Andrew will infect Richard. A few days later Richard went to the shop in the evening, put two bottles of milk in his basket but decided he only needed one, so put one back. Sylvia, who’s 82 and lives alone so needs to do her own shopping, went to the shop the next morning in a protected slot for at risk groups, picked up that bottle of milk and put it in her basket. On the way out, Sylvia had an itchy eye and rubbed it. It is highly likely Sylvia will be infected, and there is a substantial chance that she will die. Richard also had contact with multiple people in the meantime, three other people in the pub were infected by Andrew, and those people also had contact with multiple other people. Suddenly there are multiple Sylvias out there, all of whom might die. All because Andrew wanted a pint with a few pals.

When we’re making decisions in the presence of Covid-19, we need to think about the far reaching implications of those decisions for other people. We need to consider not just ourselves, not just for our immediate contacts, but the people that they will have contact with, and the people those people will have contact with. The costs of our decisions, once we account for this long chain of negative externalities, are substantial, because they are highly likely to impact vulnerable groups for whom the consequences of catching Covid-19 are very serious indeed. Surely these costs are going to be greater than the benefits of having a pint with a pal. We just need to think about them.

Ethan, on the other hand, stayed at home, and has a clear social conscience. People should spell out the first letters of the characters in this story in the order in which they appear, and not be one. Otherwise the only solution to this problem is to make people realise the negative externalities they generate by taking draconian measures to ban everyone from being outside for no good reason, with substantial fines.

But come on UK…yes it’s an annoyance we can’t do everything we want to do, but on the grand scale of things it won’t be for long. We can do it!

So people need to:

  1. Think about the long sequence of consequences of their actions, and take account of the costs not just for them but for everyone they connect with, and everyone they connect with, and everyone they connect with. We need to internalise the negative externalities we generate.
  2. Let’s, as a nation, frown upon and discourage people flouting Government recommendations about social distancing to give those that disobey an extra incentive to toe the line and do their bit for the good of society. It should be a social norm to do as the experts suggest (they’re doing their best in a world of unknown unknowns).

And do stop panic buying. We have robust supply chains, and there’s only so much toilet paper one needs …the only thing that’s causing a problem is too many people buying too much stuff! Of course there’s an incentive to do it, especially if everyone else is, but we’ll all be much better off if we all stop. So just stop.

Authors

The Fraser of Allander Institute (FAI) is a leading economy research institute based in the Department of Economics at the University of Strathclyde, Glasgow.

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