Question

1. Some Economics of Pandemics: For each of the following markets, consider the effects of the COVID-19 pandemic. Suppose there is a pandemic that is causing individuals to get sick and forcing firms to shut down to avoid contagion. Using simple supply (marginal cost) and demand (marginal benefits) curves explain the effect of this pandemic on each of the following markets/situations. In each market, carefully explain what is changing (e.g., demand/supply, quantity demanded/supplied), why it is changing (i.e., what underlying factor is changing), and why. Further, explain any externalities using a social marginal benefit/cost curve. (a) As firms are forced to shut down (to limit contagion), explain what happens in the labour market and how equilibrium wages are affected. (b) As individuals become sick, explain the effect on the health care market (supply and demand for medical services). What are the externalities in this market that may have effects beyond the individuals supplying and demanding these services? (c) Consider the market for fuel. How do the restrictions facing firms affect this market? Explain the externality effects of this change. (d) Consider two labour markets, one for high skilled labour (e.g., white collar) and one for low skilled labour (e.g. service and manufacturing). Explain what will happen with the changes affecting firms in each market. Given the nature of the type of work conducted in each market, which market will be most affected by "shelter-and-stay" or "work-from- home" orders? What does this imply for the distribution of income between employees in each sector and the prevalence of poverty. (e) Consider the macroeconomy via a diagram of aggregate supply and aggregate demand (i.e., demand and supply for all goods and markets as measured by GNP). Explain how the changes in the labour force and among firms affect these two curves and equilibrium production and prices. What will be the effects of this on GNP?

Answer 1

a) In labour market, the demand for the labour decreases because the firms are shutting down their production unit, which further pushes down the wage.

b) As people start getting sick, the demand for health care services increases rapidly (because of the nature of the pandemic). In order to meet the increased demand of product such as hand sanitizers, masks etc., the price of these product increases. With the increase in price, the goods may not be accessible to certain group of population who may end up spreading the virus. Also, the demand for hospital beds and advanced equipments increases which cannot be supplied in a short period of time as the production is fixed. Therefore, people end up dying.

c) Due to closure of working place, there are lesser traffic on road and less fuel consumption. Therefore, the demand for fuel decreases. With decrease in the demand for fuel, the price should fall. Also, with decrease in traffic on the road, the quality of air improves and people have fresher air to breathe

d) Given the nature of work carried on in two different merkets, the white collar workers might be able to work from home as their work may not necessarily demand their physical presence. However, the blue collar workers doing manual work, cannot work from home as the nature of their work demands physical presence at the work site. Therefore, in such scenario, the blue collar workers will be affected the most as many of them might not be paid for the entire period of closure while the white collar workers are continued to be paid. This further increases the inequality between the rich and the poor in the society. The rich people working on white collar jobs have enough money during lockdown whereas the poor people, with no money and increased price of other goods and services are further gripped in poverty.