The public policy dilemma (Indian Express)

Mains Paper 2:Governance
Prelims level: Not much
Mains level: Balancing the conflicts and policy making between various stakeholders

Context:

• Since the days of Frank Knight, economists have differentiated between the two.

Differences between risk and uncertainty:

• Risk has a known probability distribution.
• For uncertainty, the probability distribution is unknown.
• COVID-19 makes us confront uncertainty, not risk.
• For uncertainty, there is a subjective probability distribution, which can, and does, vary from individual to individual.

Subjective probability distribution:

• Through information and experience the individual already possess.
• There are various rationality assumptions used by economists. They are often violated.
• Otherwise, behavioural economics wouldn’t have taken off.
• Typically, given a situation, when your decision doesn’t agree with someone, you say they are being irrational.
• However, with uncertainty, the problem may not be with rationality assumptions, but with differences in subjective probability distributions.

Availability of data affecting various factors:

• Because of COVID-19, there is a certain risk of getting infected. Let’s call this the infection rate — total infections divided by the total population.
• We don’t know this infection rate for India,.................................

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Who do we test?

• Those who show symptoms, those who have been in contact with confirmed patients and those who suffer from severe respiratory diseases.
• Most countries do something similar.
• In other words, when we work out an infection rate based on those tested, there is a sampling bias.
• This isn’t a proper infection rate.
• The only country where we have had something like a random sample is Iceland. There, the infection rate was 0.8 per cent.

Death rate:

• There are similar caveats about the death rate.
• If we mechanically divide number of deaths by the number of confirmed cases for India, we will get a death rate just over 3 per cent.
• The global figure is a little less than 7 per cent. But neither of these is a death rate for the total population, since only those with severe symptoms are included in infection numbers.
• Three per cent or seven per cent are over-estimates.
• In a controlled environment like Diamond Princess, death rate as a ratio of total passengers, and not those infected, was less than 0.4 per cent.
• The true infection rate and true death rate are not alarming numbers.

What does this have to do with differential subjective probability distributions?

• There are slices in India’s population pyramid with rural/urban and other spatial differences too.
• Consider two extreme types.
• Type A, who are globalised in information ..............................

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How Type B forms subjective probability?

• Type B, someone whose life expectancy is 60, without a fixed income stream and whose health concerns are tuberculosis and water-borne diseases, not COVID-19. Nor is access to information that globalised.
• High subjective probability will be attached to loss of livelihood and low probability to death from COVID. Both the types reflect subjective probabilities.
• Neither is “irrational”. There is tension between the two.
• Type A would like the lockdown to continue indefinitely, until long tail of the infection curve tapers off, perhaps beyond September.
• Type B would like lockdown to be eased soon, with necessary restrictions in hotspots.
• There is indeed tension between lives and livelihood.
• Even if health outcomes and information access are like Type A, but income is contingent on growth, preferences might mirror Type B.

Balancing differential individual preferences in public policy:

• Type A disproportionately influences policy. This determination of aggregate preferences is a dynamic process.
• Therefore, sooner or later, Type B contests this and as the lockdown is prolonged and livelihood costs mount, discontent surfaces, as it has across a range of countries.
• There were also welfare economics ..........................................

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Conclusion:

• Increasing or decreasing the lockdown decision illustrates the public policy dilemma.
• Without a revival in growth, tax-paying capacity of Type B is limited and with job losses, some Type As become Type Bs. The choice is starker.

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General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q1. With reference to the draft new rules for satellite TV channels, consider the following statements:
1. All channels have to take security clearance from the Ministry of Home Affairs (MHA).
2. Once granted, the clearance is valid for 10 years.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

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Mains Questions:
Q1. What are the major causes of ........................................................?