Common good vs individual interests

Book review of Economics for the Common Good

Economics for the Common Good

Jean Tirole 

Princeton University Press

563 pages; Rs 2,014

This November was not the first time health concerns, a result of the smog that engulfed the National Capital Region (NCR), have dominated the public discourse. In fact, the issue has been discussed ad nauseam with almost clockwork-like precision every year. Yet, nothing changes. 

Principal among the causes for high pollution levels is the burning of paddy stubble in the neighbouring states of Haryana and Punjab. The explanation is pretty straightforward. The combined harvesters used to harvest paddy cannot cut the crop close enough to the ground, leaving a stubble for which the farmer has no use. Given the short duration available between harvesting summer paddy and sowing winter wheat, farmers find burning the stubble the simplest way to clear fields. The smoke from the burning stubble drifts southwards and accumulates in the low-lying NCR just as the monsoon winds abate. This pollution, together with the cracker-burning over Diwali, takes NCR’s air quality to notoriously high levels of toxicity.

Pollution is a universal bad. It affects everyone. So why do farmers continue burning stubble? Does the economic incentive for doing so outweigh the ill effects of pollution for them? If so, can state interventions induce a behavioural change for the greater good?

Then there’s also a political economy angle to consider. 

Farmers are undoubtedly a powerful political constituency that no politician would care to antagonise. But pollution is a public health issue — which affects every political constituency. So why won’t politicians tackle it with greater urgency? 

Let’s turn to another contentious issue — the cap on stent prices.

Sometime ago, the National Pharmaceutical Pricing Authority (NPPA) capped the price of stents — the small wire structures used to treat blocked arteries.

The move, applauded for obvious reasons, reportedly led some manufacturers to consider withdrawing some of their products from India and others express their unwillingness to introduce the latest technology. 

India has a long history with price caps under the erstwhile plan and control model. Why would a regulator, knowing the obvious fallout of this decision, impose a price cap? Subsidising health care for the poor is a laudable objection. But why not adopt a different strategy? 

These are some of the issues that Nobel Laureate Jean Tirole explores in his new book, Economics for the Common Good. Mr Tirole is one of the world’s foremost authorities on government regulation. 

The book goes beyond that, however. Divided into five parts, it deals with a plethora of issues ranging from influence of economists on society to the role of markets, its relationship with the state, how economists should dispense information, financial market stability, competition and regulation. 

Though it is written for the common man, it requires careful reading. Littered with real life examples, which books of such nature tend to lack, it is a treasure trove of information. 

Now, returning to our problem. 

In the book, Mr Tirole says, “Whatever their place in society – people react to the incentives facing them. These material or social incentives combined with their personal preferences define their behaviour and this behaviour may or may not be in the general interest.”

So reconciling people’s interests — in this case the farmers — with the common good — less pollution — would require building institutions, he says. Though the author is careful to point out that each situation is unique and requires a different approach, he does say that the issue of pollution, which lacks a market mechanism for protecting those who passively suffer its impact, demands an environment policy. 

On the role of politicians, Mr Tirole says, “It is unproductive and irresponsible to blame politicians for the limits of political action. Instead it is important to realise that politicians like all of us react to the incentives they face.” 

But given that pollution affects every constituency — the rich and the poor alike — why don’t politicians address the issue effectively? Or is it the case that politicians don’t believe that public health is an issue that would sway the electorate?

On the contentious issue of price caps, the author states that “When the state decides to set the price of a scarce good at four hundred dollars rather than its market price of one thousand dollars, it has the laudable intention of making this good accessible to more people….. but it does not consider the indirect effects – in the short run that means waiting in line or some other form of inefficiency — in the long run it means a depletion of property supply due to a price that is set too low.”

Price caps were originally introduced when competition was limited and companies were prone to ripping off customers. But if competition is what is needed, wouldn’t the logical answer be to open up the market to more producers? If one is worried about cartelisation, then isn’t the regulator’s job ensure that there is no collusion? And if helping the poor is the objective, then wouldn’t a price fund to subsidise the poor be a better alternative?