It's time to zoom in from the macroeconomy and think more about the individual choices and actions that collectively gave rise to the some of aggregate economic outcomes that we observed.
It's time for micro...or mi-corona-mics!
Over the next few several weeks, I'll spotlight microeconomic ideas in the news. And as has been the case since March, COVID will play the leading role in driving many of the choices taken by business, individuals and policymakers. To kick off, let's look at how so five big microeconomic ideas are constantly present in so many pandemic-related decisions we make.
Incentives Matter: Humans respond in predictable ways to not just monetary incentives, but also to incentives like fear, greed, reputation, sex and other feelings. Many of these are rooted in our evolutionary biology. Which would make one think that the fear of a disease like COVID19 would be incentive enough to wear a mask! But the human decision-making process is also subject to biases, faulty calculations and irrationality. To incentivize folks to make sound public health decisions, officials are rewarding them for wearing masks. Ocean City offered rewards to beachgoers who wore masks on the July 4th weekend. In Las Vegas, casinos are giving cash rewards.
Tradeoff are everywhere: Tradeoffs are a major theme in the story of controlling the virus. Every measure to curb the pandemic like large-scale social distancing and lockdowns have been very beneficial. On the other hand, they come with large socioeconomic costs, not only to economic activity, but also to the social fabric when people cannot interact, as well as mental costs to individuals. This paper from UChicago economists takes a deep dive into the basic economics of managing the pandemic and the associated tradeoffs. (It was written early on in the earlier months of Covid so some points could be updated with information and data that subsequently emerged, but the economic principles discussed remain unchanged) Going back to the more specific mask example, despite the enormous benefits of wearing a mask during a pandemic, some people estimate the costs too large. Sometimes these estimated costs are not directly monetary, but ideological.
Individuals are constantly using marginal analysis to evaluate tradeoffs. How much will the next increment of preventative behavior reduce my probability of getting sick? What will be the opportunity cost-- the value of what I give up-- be when I make a choice?
This kind of decision-making can give rise to an "externality"-- a situation where an individual is only considering their own private costs and benefits and not necessarily the costs/benefits to society. This is where the role of good government policy comes. Good institutions align the social interest with the private interest. The authors in the UChicago article cited above write:
The nature of transmission via person-to-person proximity creates various “externalities”—individuals’ decisions to interact do not fully incorporate the costs imposed on others. In general, people with the disease (symptomatic or not) will have too many infection-causing contacts, and those without the disease will not have the proper incentive to avoid getting it. These “negative externalities” are the main reason for government-imposed social-distancing measures of the type now in effect.
Finally, the last "Big Idea" in micro is the "Power of Trade." When individuals (or countries) specialize in their comparative advantage and trade, everyone is better off. Political rhetoric that challenges the benefits of global trade has been high in the past few years. The pandemic has certainly exacerbated the situation, not only because of the restrictions in the movement of goods and people, but also due to the shortage of essential supplies like masks and ventilators in many countries that have prompted more protectionism. However, as this piece from Econlife describes this might be counterproductive and might actually prompt more shortages.
