"Externalities are adverse effects on others that rational self-interested individuals do not internalize when they engage in their personal cost-benefit analysis. When choosing the extent of their social and economic activity, self-interested individuals weigh their own risk of becoming infected and the associated costs, from having mild symptoms to potentially dying, but do not internalise that when they become infected, they impose costs on others by passing on the disease. These externalities therefore call for mandatory public health interventions, such as lockdowns and quarantines, that limit the spread of the virus."
This description is from a recent paper by two UVA economists quantifying the externality of a COVID infection.
The personal cost or burden to an individual of getting sick is far less than the total costs they impose on society (through their interactions which may result in additional infections).
A picture from the analysis:
The presence of the virus in society is creating all kinds of situations where externalities (positive or negative) are generated.
Another example: workers involved in the delivery services of essential (and non-essential) products like groceries. These workers at Instacart, Amazon, Target and other retailers or platforms are responsible for keeping our kitchens stocked even while we stay at home.
You may wonder, "Why is this an externality? They are being paid for the services."
Leigh Osofsky, a professor at UNC-Chapel Hill writes:
"Imagine a “shopper” for Instacart — the app-based food delivery platform — delivers groceries to someone with COVID-19. It begins as a private transaction: The worker gets paid, and the sick customer gets food delivered in a time of need. But there is an additional benefit to the rest of us — the positive externality — from the delivery. Everyone is safer because the sick consumer doesn’t have to go to the grocery store.Then there is the extra cost. The Instacart worker faces a heightened health risk by spending more time outside of home and delivering groceries to the sick customer. While the customer may pay a higher tip as a measure of her gratitude, it is unlikely to be enough to take into account the value of the broader benefit to society or the concentrated risk that the Instacart worker faces in producing this benefit."
What is the result of this positive externality?
Well, it means that delivery services will be under-provided. That is, we could have had more delivery services, thus more people staying safely at home, if this external benefit was internalized. Some retailers like Amazon, Target and Whole Foods have internalized the externality by boosting wages for workers. Instacart provides protective gear for its shoppers. However, as Osofsky writes:
".. a few companies stepping up to compensate their own workers slightly more isn’t enough to compensate the workers for the great benefits they are providing to the public at large.In economics, widely shared public benefits such as large parks and clean lakes tend to require public — that is, government — support. Similarly, the production of a good that is costly but has a large positive externality, like the efforts of all these workers, needs a government response."
Examples of an appropriate government response would be hazard pay or subsidies for protective gear and actions.
The critique of a government response is: "How does the government know how much to subsidize?" This piece by another group of academics lists way that private firms are internalizing these costs/benefits and advocates a "Hayekian" or "bottoms-up" approach:
"A Hayekian approach — relying on bottom-up rather than top-down solutions to the problem — may be the most appropriate solution. Allowing firms to experiment and iteratively find solutions that work for their consumers and employees (potentially adjusting prices and wages in the process) may be the best that policymakers can do."
This may yield innovative solutions...eventually. But is there really time during a pandemic to tinker and experiment?
