This article is part of the series Governance, in crisis.

By Adam Przeworski
Carroll and Milton Petrie Professor Emeritus
Department of Politics
New York University

Wherever political opposition exists, they tend to criticize the lack of preparation of governments for the crisis. Ex-post it is obvious that we were not prepared for COVID-19. But ex-ante? Would the opposition have been more prepared had it been in office? In some countries we have indications that it would have been. Yet remarkably, US President Trump dismantled the National Security Council unit responsible for preventing infectious diseases, an Obama administration legacy.

But consider the issue in generic terms. What is the optimal number of ambulances a city of some size should maintain? Ambulances cost money, which means that they have opportunity costs. To make it concrete, the price of an ambulance in the US varies between $80,000 and $200,000, depending on the model and the equipment. The cost of an average spell in a homeless shelter of one person in New York City is about $38,000. The cost of a school lunch is $1.75. This means that under fixed budget constraints, one additional ambulance is equivalent to between 2.2 and 5.3 fewer stays in homeless shelters or between 48,000 and 114,000 fewer school lunches.

If we prepared for every possible emergency, our lives during normal times would be much impoverished.

Clearly, what is optimal depends on how we value being able to get to a hospital in an emergency against everything else. But the answer cannot be that the optimal number is whatever would be adequate to cope with the worst possible emergency. That would be beyond the budget of any government. True, there were people who were raising the specter of an impending pandemic. But potential emergencies are many. Some are predictable: the increasing frequency of some natural disasters – hurricanes, floods, droughts – is by now a well understood consequence of climate change. In turn, the uncertainty about some catastrophes is Knightian: it is difficult to attach probabilities to them, so the only rational principle we could adopt is to be prepared for the worst. Moreover, even if we knew that some catastrophe is likely to transpire at some time, we are unable to predict at what time, so preparedness would have to be permanent. If we prepared for every possible emergency, our lives during normal times would be much impoverished. Therefore, most criticisms of governments for not being prepared for COVID-19 are ill-founded and likely driven by partisan politics.

But there is another aspect of being prepared, a “second-order” preparedness. If an emergency, say a major fire, occurs in one city, how quickly can it get help from the near-by fire brigades? Can the government reallocate budget resources to employ more fire fighters? Can the government order private companies to rapidly produce more fire hoses? Can it nationalize private hospitals?

However markets function during normal times, they fail miserably in face of an epidemic. It is useful to distinguish those market failures occurring in ordinary times that make us particularly unprepared for a pandemic, from those induced by the pandemic.

Most prominent under the first category is the failure of insurance markets in which people know their individual risks: adverse selection in health insurance markets leads to many people being un- or under-insured. Among the many other market failures, one perhaps non-obvious is that drug companies have no incentives to invest in diseases that are ephemeral, even if they are highly mortal, as Amesh Adalja a physician at Johns Hopkins explains:

“[T]he market has not encouraged the development of drugs for use in acute infections… [P]andemics arrive infrequently and don’t necessarily stay for long – characteristics that make them a commercial liability. It’s one of those cases where a traditional market economy doesn’t work so well. Suppose you made a SARS antiviral in 2003 after its 2002- 03 run. You would not have had a return on investment, because SARS was gone.”

However markets function during normal times, they fail miserably in face of an epidemic.

Perhaps most severe among the market failures generated by an epidemic arise from externalities that are not reflected in prices. As an example, the market price of a mask is what people are willing to pay to protect themselves from others. But the social benefit of a mask is in protecting others: it was estimated that at the onset of the COVID-19 epidemic, one infected person gave the disease to about 2.5 others. Individuals do not internalize this benefit and are not willing to pay the price that would incorporate the marginal social benefit. In turn, monopolistic pricing surges whenever some company can supply the means to deal with the disease. New York City paid $7.50 per mask that cost 50 cents before the outbreak.

This is an excerpt. To read the full article, visit The Global.
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