Economics of the Pandemic

Malini Sharma

The Covid-19 spell has left governments, markets, and civil society wobbling through disruptions and damage. The ambiguity that envelops not only the evolution of the disease but also its impact makes it a challenging and complex task for policymakers to devise a suitable policy response. The pandemic has brought to the forefront some key ethical questions that we must explore. The ‘Human gene’ is thought of as the most skilled of making a choice based on ‘free will’, on ‘reason’ and ‘rationality’. From the study of human behavior, it is widely known that the current setting can be related to behaviour of people, the choices they make and human tendency for cognitive error, to be able to forecast patterns and design effective interventions. Today, the whole world stands on the edge, geopolitics at a cusp, policymakers in a dilemma to generate an appropriate policy response. This is the classic case for strategic thinking and can therefore draw on insights from the intersection of behavioral economics and game theory. The former is a field of social sciences that is a blend of economics and psychology and looks into human decision-making behaviors, whereas the latter is the study of models based on strategic interactions between players, on rational choice and on maximizing behaviour by the people. While initially developed for use within the purview of economics to understand choices that result from the behaviors of firms, consumers and markets, game theory is now used across a wide array of realms including political economy.

Game theory is the science of strategy that deals with outcomes that are produced by interactions, based on the behavior of the players. It is a tool to study interactions in the context of interdependencies. A game has two main forms: strategic games and extensive games. A strategic game is one in which players simultaneously choose actions and an extensive form game is one in which actions are chosen sequentially.

The novel Covid-19 pandemic seems like a real time situation that can be fitted well into the basic game theory model called the ‘Prisoner’s Dilemma’. The prisoner’s dilemma is basically a state of affairs in which there is an incentive to make a choice that may not produce the best possible or optimal outcome for the group as a whole. Some aspects of this pandemic reflect the same premise, such as the decision to self-quarantine during a pandemic looks a lot like a move in a multiplayer form of this game. One can either cooperate, and do something that costs a little while helping those around, or deviate, and bring one, a small benefit but at a greater cost to those around oneself. Another example can be, vaccination which is in fact a positive externality. When an individual chooses to get vaccinated against the disease, this can help prevent the spread of this disease, thereby benefiting others in the process.

If one maintains social distancing, it is not necessary that he/she will not contract the virus as it also depends on what others are doing. Thus, it is a ‘game’-There are strategic interactions. Let us say, we have a two player Prisoner’s dilemma game. Both players ‘A’ and ‘B’ have two choices. Choice ‘C’, in which both choose to maintain social distancing and hence cooperate and choice ‘D’, where they both deflect and do not social distance. The payoff matrix is given below:

Player B
Player A	Strategies	C	D
	C	5,5 (C, C)	0,8 (C, D)
	D	8,0 (D, C)	1,1 (D, D)

The efficient outcome is (C, C) with respective payoffs (5,5). This occurs when they both agree to cooperate and maintain social distancing. This is the result of collective rationality. However, here both the players have a unilateral incentive to deflect and this outcome becomes unstable and fragile. Each player becomes vulnerable to the so- called ‘selfish gene’ inside of him and has an urge to cheat and deviate and thus get a higher payoff for oneself. If ‘A’ falls prey to this temptation, thinking that ‘B’ would have done the same and drops the precaution of social distancing, then he gets a small benefit (8,0) but at the cost to others in the society. If player ‘B’ is led off by the temptation to deviate assuming that ‘A’ would have reacted in the same way and decides not to distance himself, then likewise his payoff is (0,8). Individual Rationality leads them to settle at the ‘optimal’ outcome, where both them end up in deviating with lower payoffs for themselves at (1,1) and a higher risk of getting the virus. This in fact is what is called the ‘Nash equilibrium’. Cooperation gets destroyed by the ‘Art of War’ and paradoxically non-cooperation becomes the dominant strategy. Ironically, the biggest debate rattling the world is that which political power would emerge as the winner in this ‘Covid stirred race’ for dominance.  Questions that come to ground are, whether a country should cooperate with others and share the results of its innovative practices or not? What are the payoffs and the costs? What should be the geo-political policy response? Here lies the ‘tight-spot’ faced by policymakers today.

Another example is, the widespread practice of hoarding of essential commodities which is being commonly observed amongst the panic-stricken people of almost every country affected by the ‘exogeneous Covid-19 shock’. Even though all may not voluntarily choose to hoard, but given these uncertain times of today, it is very natural for each of them to take all possible preventive measures. This situation fits into a two-player prisoner’s dilemma game where, the strategies available to both the players ‘A’ and ‘B’ range from, both engaging in hoarding, or only one of them is hoarding goods and finally none of them being involved with hoarding of necessities. In case, the first outcome is chosen by both ‘A’ and ‘B’, then this is a wobbly and unstable one, as it would lead to scarcities and a rise in the general level of prices. If ‘A’ is rational and decides to hoard as a safety measure given that he is not sure of the B’s choice and if he decides in the favor of not hoarding while ‘B’ chooses otherwise, then player ‘A’ may not be left with any commodities to buy. Likewise, for player ‘B’. So now the question arises that, are people acting rationally? At a collective level, hoarding leads to shortages of goods in the market. But if people behave rationally, then it actually becomes optimal to hoard if everyone else also does so. But hoarding creates the very supply problem, they are trying to avoid in the first place. Thus, this situation clearly coincides with the prisoner’s dilemma game.

In the current times, the main players are the citizens and the governments whose choices make a difference and to a large extent play a vital role in checking the pandemic, which had constructed the model in question in the first place. Let us say, all consumers are pessimistic hoarders and would go on purchasing essential goods, whatever be their price, then this would consequently raise prices, leading to inflation. In these cases, the governments could deliberately increase the prices of certain items such as surface disinfectants. People would opt to buy these in smaller volumes, leaving more stock on the shelf and increasing buyer confidence that there is no shortage. This is nothing but the government, a player trying to play the game of incentivization in the game theory model.

COVID-19 will reshape our world. We don’t yet know when the crisis will end. But we can be sure that by the time it does, our world will look very different. How different will depend on the choices we make today. Every stakeholder’s choice is an externality for others. Global pandemics need global solutions. ‘Radical scaling up of international cooperation among scientists, economists and policy-makers is the need of the hour’. A cooperative strategy by all the players in the ‘Covid-Game’ is the optimum one. It is the Nash equilibrium, in the ‘Covid-induced policy cogmaire’!