Policy frameworks for pandemics - part 4 - incidence of costs versus incidence of benefits...

Every day we hear the news about the number of cases of people dying from Coronavirus.  These numbers are shocking and every death is a tragedy.  But not all deaths are equal. 

Let's look further into this topic and specifically at the difference of incidence of costs and benefits. 

A simple example:

Two people walk in to a bar - both order a drink.  Person A orders a pint of beer.  Person B orders a bottle of champagne.  We therefore expect person A to get a beer and a bill for say $10 and person B to get a bottle of champagne and a bill for $100 (or thereabouts, your prices may vary).  

If this was changed in anyway, many people would detect unfairness. Let's consider this more formally:

Baseline scenario

AnalysisBenefit = costBenefit = cost

Drinks switch scenario


Seems reasonable so far?

If we look more broadly at economic activity, we see many cases where there are long-standing structural divergences in costs and benefits.  Take as an example, the British NHS.  Without exaggeration one can state that the NHS is the nearest thing to a secular British religion.  Every serious politician must miss no opportunity to praise the NHS and to criticise the NHS is pretty much a career-ending move.

And yet, since the NHS is funded from general taxation it's broadly the case that higher earners pay more than lower earners. The benefits are evenly distributed for some fields - consider the existence of an emergency department as being a form of specific insurance that covers everyone. Yet oncology is only relevant for those suffering from cancer.  The key facts here are:
  • trust
  • settled status
  • legitimacy 
What does this mean?  The NHS is broadly viewed as a trusted organisation by the UK polity.  The settled status means that the remit of coverage from the NHS is ever expanding but within a constrained framework, the constraint being the budget.  Legitimacy is demonstrated through repeated democratic voting - general election mandates don't suggest cutting the NHS budget and so this imbalance of costs and benefits is viable and likely to continue.

But what about Covid-19 changes to policy?  The situation is fluid and so drawing conclusions is hard.

In the next part of this series, we will look at policy choices and be so bold as to offer a policy recommendation...

The regular reader may note that this really is rather off-topic.  And from the perspective of a blog that has traditionally looked at topics such as Fixed Income Trading: New venues ( How many Fixed Income trading venues are there? ) , Product Management and Fintech and What's the difference between an EMS and an OMS? this may seem a little unusual.  However, your author was trained as an Economist and took a keen interest in Health Economics and the interface between rationality, efficiency and morality.  As such, with the usual topics somewhat becalmed I decided to repurpose this blog for an intellectual diversion.  I can assure the reader that normal service will be resumed sooner or later...