Externalities and COVID19
In the simplest way we might define negative externalities as an uncompensated harm to third parties. What does this mean in the context of COVID19? During the pandemic it was possible to unknowingly become infected and either pre-symptomatically or asymptomatically spread it to others. Any behavior you may exhibit going about your daily life could be posing unwanted and uncompensated risks on me and vice versa. These risks and harms could have potentially proliferated throughout the food and healthcare system (as we saw in our food supply chains and currently witnessing in India).
There are a number of remedies for negative externalities. Probably the most well known solution is related to the Coase Theorem named after economist Ronald Coase. In the typical example of environmental pollution, the assignment of property rights and bargaining internalized the externality. Either the polluter pays their neighbors for any harm done, or the neighbors pay the polluter to pollute less. As long as transactions costs are low and property rights are clearly defined both parties can reach an agreeable solution.
Alternatives to the assignment of property rights and bargaining include taxing or regulating the behavior to get less of it. But without rapid and available COVID testing it was hard to know who to tax or regulate, at least on a person by person basis (and what would that even mean - fines/citations/house arrest?) Similarly, it's hard for two individuals to reach a solution from bargaining.
Unfortunately, this lead to controversial and blunt solutions including lockdowns/shutdowns/capacity restrictions and mask mandates. The genius of Coase was the recognition that externalities are reciprocal. While my pollution may harm you, polluting less harms me. Similarly, shutting down businesses may have reduced the spread of COVID, but it also imposed costs on owners and employees not to mention mental health and other costs.
Based on field research and game theoretic reasoning, Elinor Ostrom concludes that in many cases social dilemmas like those recognized by Coase can be handled through cooperation:
“If one sees individuals as helpless, then the state is the essential external authority that must solve social dilemmas for everyone. If, however, one assumes individuals can draw on heuristics and norms to solve some problems and create new structural arrangements to solve others, then the image of what a national government might do is somewhat different…National governments are too small to govern the global commons and too big to handle smaller scale problems.”
In many cases we saw and continue to see businesses and other organizations adopting their own related practices to mitigate the risks of COVID. The formation of 'bubbles' and 'pods' are one example. It is an interesting question what social conventions and alternative arrangements to government interventions would have developed in absence of the response we saw from federal, state, and local governments. One silver lining was our system of federalism, that at least allowed different communities to experiment with different ways of dealing with COVID vs a one size fits all blunt federal solution.
Technology Changes Everything - Vaccines
Howard Demsetz holds that technology and knowledge play a crucial role in the development and adoption of property rights and the internalization of externalities and social dilemmas:
Changes in knowledge result in changes in production functions, market values, and aspirations. New techniques, new ways of doing the same things, and doing new things-all invoke harmful and beneficial effects to which society has not been accustomed. It is my thesis in this part of the paper that the emergence of new property rights takes place in response to the desires of the interacting persons for adjustment to new benefit-cost possibilities.
Vaccines absolutely change knowledge and tradeoffs about COVID risks and mandate new adjustments to the different cost-benefit possibilities they bring. Once the vaccine is readily available the externality mostly becomes internalized.
***Once an individual is vaccinated the probability that they can become infected and risk infecting others is very small. They are practically no longer able to pose unwanted and uncompensated risks on others. Likewise, even if a large number of individuals choose to remain unvaccinated, they are no longer able to pose any significant unwanted or uncompensated risks on others if they become infected with COVID. All that is required is individuals are free to obtain the vaccine to protect themselves from those unwanted risks. And those that choose to remain unvaccinated are willingly accepting the risks that go along with that decision.***
Internalizing the externality of COVID does not require herd immunity or that we meet some aspirational goal of vaccinating 70% of the population. There is certainly an additional challenge related to those vaccinated that may be immunocompromised and may not mount the necessary immune response to be protected from the unvaccinated. This calls for a bit more thinking and maybe an additional requirement of a certain percentage of the population be vaccinated and continue mask mandates until that threshold is reached. I'm not sure that percentage is 70%.
***With that exception, given sufficient access and availability, we no longer have uncompensated harms and no longer need the blunt makeshift regulatory solutions (restrictions and lockdowns) or social conventions (masks) we had before. Sufficient availability means each individual in society has the opportunity to take or avoid the relevant risks of COVID without any need of further restrictions or new social conventions to be built around 'vaccine passports' or the like.***
Instead of putting energy into figuring out a vaccine passport scheme or maintaining excessive restrictions until some large number of people are actually vaccinated, our goal should be to focus that energy on simply making it available for those who want to get it (including children) and combating misinformation about it.
NOTE: To be clear I am not saying that the unvaccinated pose ZERO risks to others or that they cannot infect other people that are unvaccinated. I'm not saying it is SAFE to be unvaccinated. There will continue to be people infected with COVID if they are unvaccinated and there could still be serious health consequences for some. I am only saying that these risks are becoming willingly accepted and those choosing to go unvaccinated are accepting these risks and the consequences in a way that was NOT POSSIBLE before the vaccine became widely available. The negative effects of COVID cases DO NOT GO AWAY but most of the uncompensated negative effects do go away because those that want to avoid or at least drastically reduce the risks/costs can easily do so by getting vaccinated. I personally believe there continue to be POSITIVE externalities associated with the vaccine and the more people that get vaccinated the better. I personally received the J&J vaccine. I am in no way whatsoever making an antivax/anti-mask argument, or have intention here to undermine vaccination efforts.
***UPDATE*** More recent data suggests the tradeoffs have changed. It is not true that those that want to easily avoid the externalities can do so by making the private choice of getting vaccinated. With the new variant and current low levels of vaccination, many more uncompensated harms will materialize. In broad economic terms the positive externalities (public good aspects) of vaccines extend beyond herd immunity and slowing the spread of the virus to include dampening or reducing new variants. That’s the good news. The negative externalities generated by the unvaccinated extend beyond spreading the virus to selecting for more infectious variants (and of course all the negative health consequences that go with extending the pandemic to include virtual schooling and mental health). We’ve got a long way to go internalizing these externalities.
For example see: COVID-19 vaccines dampen genomic diversity of SARS-CoV-2: Unvaccinated patients exhibit more antigenic mutational variance. Michiel J.M. Niesen, Praveen Anand, Eli Silvert, Rohit Suratekar, Colin Pawlowski, Pritha Ghosh, Patrick Lenehan, Travis Hughes, David Zemmour, John C. O’Horo, Joseph D. Yao, Bobbi S. Pritt, Andrew Norgan, Ryan T. Hurt, Andrew D. Badley, AJ Venkatakrishnan, Venky Soundararajan https://www.medrxiv.org/content/10.1101/2021.07.01.21259833v1
References:
The Problem of Social Cost. R. H. Coase. Journal of Law and Economics, Vol. 3 (Oct., 1960), pp. 1-44
A Behavioral Approach to the Rational Choice Theory of Collective Action: Presidential Address,
American Political Science Association, 1997. Elinor Ostrom. The American Political Science Review
Vol. 92, No. 1 (Mar., 1998), pp. 1-22
Toward a Theory of Property Rights. Harold Demsetz
The American Economic Review, Vol. 57, No. 2, Papers and Proceedings of the Seventy-ninth
Annual Meeting of the American Economic Association. (May, 1967), pp. 347-359
