Question

Background to the question A pandemic has struck, and a government is trying to manage the response.   

QUESTION

You have been hired as an economist to help consult on the government’s response. In your answer you should use appropriate models (and diagrams) studied in class.

1. Health officials have called for the government to enforce “social distancing” measures in order to slow the spread of the virus. Consider the market for food delivery (e.g., Deliveroo). The business of this firm is to deliver food from a restaurant to a household. Suppose the private marginal cost of supplying delivered food remains unchanged. However, the food delivery firm is contributing to the spread of the virus by moving from house to house and restaurant to restaurant, i.e., violating social distancing rules. This additional spread has health costs for individuals who are external to the transaction (i.e., who are not delivering food (sellers) and who are not receiving delivered food (buyers))

In what follows, ignore the negative impact that social distancing has on household income. Assume that individuals’ income remains unchanged. The government would now like you to help them understand “hoarding” behaviour and its effect on the market. We will define hoarding behaviour as the tendency to buy excessive amounts of a good, though individuals are not expected to use more of the good. For example, the government sees that individuals are hoarding toilet paper—they are buying excessive amounts, though they are using a normal amount.

a. You decide to describe individual hoarding behaviour using game theory. You model the behaviour using a simultaneous game between two players. Assume the actions that each player can choose are to “hoard” or “not hoard”. You are seeing that nearly everyone people in society is engaging in various types of hoarding behaviours, even though everyone would be better off without any hoarding. What type of game can best describe the decision to “hoard” versus “not hoard”?

b. Given your answer to part (a), assign a set of real payoffs to each action, draw the normal form game and define and describe the Nash Equilibrium.

c. Is the Nash Equilibrium socially efficient? If not, what types of policy might you recommend to encourage individuals to achieve an outcome that is efficient?

Answer 1

Following pictures contain answers to the question in detail: