A STRUGGLING ECONOMY: Dr. David Ndii speaks on how to cushion the Kenyan economy from COVID-19
Why it would pay to compensate Covid19 +ve people: A primer on the economics of externalities. A (long) thread 1/18
What is an externality? An externality is an uncompensated benefit or cost that an activity confers or imposes on society. We refer to benefits as positive externalities and costs as negative externalities. investopedia.com/terms/e/extern…
A popular text book e.g of +ve externalites is a beekeepers pollination services to neighbouring orchards that the fruit farmers don’t pay for. Pollution is a -ve externality When factories polute, society pays health, ecological costs not factored in business calculations.
Economic theory posits that since only private costs, benefits are priced, the free market does not produce the optimal amount. The bee keeper keeps only the bees that maximize her profits, not the pollination of orchards.
If factory owners bore the full social cost of polluting, they would chose cleaner technologies. If coal plants paid for polution, they would be unprofitable. If car owners were charged a hefty carbon tax, more people would opt for electric cars.
Infectious diseases impose a huge negative externality on society. In Ghana, one factory worker infected 533 co-workers with Covid19. The factory had to shut down, and of course the private and public cost of tracing, testing and treating those infected was immense.
California’s “stubborn plateau” is attributed to people who must go out to work. Latino low wage workers accounting for 44% of those tested, and 99% of positives latimes.com/california/sto…
The emerging consensus among economists is that until herd immunity is achieved either by vaccination or natural immunity through exposure, the only way to safely open up the economy is a public health response that manages to separate infected and non-infected population.
Lets do the math. We of course do not our status, as testing rate is still low. If we benchmark with Ghana (6500 cases, 200/million) and South Africa(19000, 323/million) who are doing massive testing suggests between 9600 and 15500 cases, 12550 average.
I have estimated that we are losing Sh400b in economic output a month to the COVID19. This translates to Sh32m per case per month. The epidemiologists are predicting that the pandemic will peak in Aug-Sep at 200 new confirmed cases a day. What would it take to stop COVID19 on
Simply put, it is to find and isolate everyone who is infected. To do that we need to test the entire exposed population, but we don’t know who those are. We can appeal, cajole or even threaten, but people aren’t known for sacrificing their self interest for the public good.
We have 1100 confirmed cases from 52,500 tests. To get 12,550, we need 600k tests, and if our infection rate is as high as SA’s, 1.2m. How do we make people come forward? In economics, we postulate that incentives work better than commands.
Take a person who makes Sh500/day. If they volunteer to be tested, is +ve, she gets quarantined 14 days, loses Sh7k. Social cost protecting her Sh7k is a society cost of Sh32m/month. How much should society be willing to compensate this person to attenuate the externality?
Lets say the public offered Sh20,000 compensation to every infected person over and above the costs of the test and quarantine (paid at the end of quarantine). We can see the testing as a lottery where +ve test wins a prize.
In fact, the challenge might be that far more people than the at risk population may turn out to be tested. If 20m people show up the system will be overwhelmed. Good problem to have. There are ways to deal with it.
person has to buy the lottery ticket. See lottery analogy here: usatoday.com/story/opinion/…
Can we afford it?
India has set a ceiling for PCR test at Rs4500 (Sh6300), but some states are doing it at Rs2500 (Sh3500). Sh5000 is a realistic figure. 1.2m tests = Sh6 billion. Quarantine and compensation budget @ Sh50k per person for 25k cases = Sh1.25 billion.
India has set a ceiling for PCR test at Rs4500 (Sh6300), but some states are doing it at Rs2500 (Sh3500). Sh5000 is a realistic figure. 1.2m tests = Sh6 billion. Quarantine and compensation budget @ Sh50k per person for 25k cases = Sh1.25 billion.
Total cost Sh7.25b Logistics & other costs (including and especially tea) Sh3.75 billion. Total cost of re-opening the economy Sh10 billion. We are losing Sh400 billion a month. Would it pay to compensate? 18/18
