The Problem of Social Cost - COVID Vaccine Edition

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 above was a very broad brushed discussion of externalities and the Coase Theorem. For more details see: https://economicsprinciplesandapplications.blogspot.com/2013/03/externalities-coase-ostrom-demsetz.html 

 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

Externalities, Coase, Ostrom & Demsetz

Traditionally when it comes to environmental pollution, the general philosophy was that ‘the polluter pays’. A factory polluting the air or water should pay for the damages that are caused. In a much simpler case, if you build a house next to me and you don’t like the smell of livestock waste coming from my property, the traditional philosophy would hold that you could have the government stop my operation. In the article ‘The Problem of Social Cost’ Ronald Coase brought new insight to the way we view social costs and the principle of ‘polluter pays.’

The insight that Coase brought was the reciprocal nature of social costs and externalities and has been referred to as the Coase Theorem. The important elements of the Coase Theorem (in the context of the present example) can be demonstrated as follows:

 1) Yes it is true that my operation is harming you via air pollution

2) However, in stopping me via government or legal intervention (or taxing my waste        production) you are harming me

3) The assignment of property rights and the potential for bargaining results in behavior that is changed or altered to account for the negative impact our choices have on others, regardless of which party is initially assigned property rights

“But the ultimate result (which maximises the value of production) is independent of the legal position if the pricing system is assumed to work without cost.” –Coase, p. 8

Coase says that the issue is that no one owns the air that surrounds my livestock operation and your home. There then follows a dispute over how the air should be used- to absorb livestock odor, or to provide a scent free atmosphere in your back yard. An externality is an uncontracted effect. It’s a harm or benefit that goes uncompensated or is not captured by prices. Whenever the cost of one’s behavior is not factored into a price by which a choice can be valued, I can harm you without compensating you for it. ( i.e. a negative externality exists)

However, if I own rights to the air, then I can choose to pollute the air. If you own rights to the air, then you can prevent me from polluting it. If noone owns the air, then it is first come first served or winner takes all.

That is not the end of the story though. What Coase emphasizes is that if I own the rights to pollute, you can pay me to limit my pollution i.e. buy those rights from me. I can then use the proceeds to alter my livestock nutrition, genetics, and management to reduce the odor my operation is causing. On the other hand, if you own the rights to pollute I can purchase those rights from you, or invest in technology that will allow me to continue my operation without violating your rights. Decisions about how the air should be used will be based on the local knowledge and preferences of both parties. This can be accomplished without major government regulation, or the arbitrary imposition of a tax.

The assignment of property rights and the potential for bargaining results in behavior that is changed or altered to account for the negative impact our choices have on others, regardless of who holds the rights. This is the essence of what is known as the ‘Coase Theorem.”

The Coase Theorem holds in the case of zero transaction costs, and approximately in the presence of transaction costs that limit the bargaining process and establishment of a price that reflects local knowledge and preferences related to the externality.  In the case of high transaction costs, Coase argues that courts should do their best to anticipate the economics involved in making the initial assignment of property rights. Coase recognizes in some cases, governments may do a better job allocating resources in the face of high transaction costs, but is skeptical. Understanding the knowledge problem, and the issues related to government decision making from public choice theory make government intervention a questionable strategy for dealing with social costs.  In later work,

Other Related Work:

Based on field research and game theoretic reasoning, Elinor Ostrom concludes that in many cases social dilemmas like those recognized by Coase can be better 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.”

Howard Demsetz holds that technology and knowledge play a crucial role in the development and adoption of property rights:

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.

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

The Coase Theorem

Traditionally when it comes to enviromental pollution, the general philosophy was that ‘the polluter pays’. A factory polluting the air or water should pay for the damages that are caused. In a much simpler case, if you build a house next to me and you don’t like the smell of livestock waste coming from my property, the traditional philosphy would hold that you could have the government stop my operation.

The insight that Coase brought was 1) yes it is true that my operation is harming you via air pollution. 2) however, in stopping me via government or legal intervention ( or taxing my waste production) you are harming me.

Coase says that the issue is that nonone owns the air that sourrounds my livestock operation and your home. There then follows a dispute over how the air should be used- to absorb livestock odor, or to provide a scent free atmosphere in your back yard. Whenever the cost of one’s behavior is not factored into a price at which a choice can be valued, I can harm you without compensating you for it. ( i.e. an externality exists)

However, if I own rights to the air, then I can choose to pollute the air. If you own rights to the air, then you can prevent me from polluting it. If noone owns the air, then it is first come first served or winner takes all.

That is not the end of the story though. What Coase emphasizes is that if I own the rights to pollute, you can pay me to limit my pollution i.e. buy those rights from me. I can then use the proceeds to alter my livestock nutrition, genetics, and management to reduce the odor my operation is causing. On the other hand, if you own the rights to pollute I can purchase those rights from you, or invest in technology that will allow me to continue my operation without violating your rights. I will do which ever is most optimal. This can be accomplished without major goevernemnt regulation, or the arbitrary imposition of a tax.

The assignment of property rights and the potential for bargaining results in behavior that is changed or altered to account for the negative impact our choices have on others. This is the essence of what is known as the ‘Coase Theorem”

The Tragedy of the Commons

http://www.prism-magazine.org/apr07/tt_01.cfm

“People like the freedom to choose their lifestyles, what they consume and when they consume it,” observes Attari. “However, the environment is a ‘commons’ that we share with other citizens of the world, and when individual choices start negatively impacting others, we need to understand how to change or alter those behaviors.”

The phrase ‘tragedy of the commons’ was first used by Garret Hardin in a 1968 issue of Science.

To illustrate, in the case of cattle grazing on public land, it is in the interest of the cattle owner to place as many cattle as possible on the land. Of course too many cattle will result in erosion and deterioration in forage quality, but this cost is shared among all grazers. The grazer does not bear the full cost of grazing an additional animal, but receives the full benefit. Each grazer acting in his own interest results in the degradation of the ‘commons’ for everyone.

Whenever the cost of one’s behavior is not factored into a price at which a choice can be valued, a commons problem exists. This is in essence what we get from Hardin ( ‘The Tragedy of the Commons’) after applying a little basic economics to his reasoning.

However, according to Coase (‘The Problem of Social Cost’) with the establishment of property rights and markets (bargaining) the externality of the commons can be internalized. Behavior is changed or altered to account for the negative impact our choices impose on others. Demsetz (Towards a Theory of Property Rights) goes on to say that property rights often evolve as a means to internalize externalities. Sometimes given the current state of technology, the costs of developing property rights and markets are greater than the benefits that would arise. However, with technological development, these cost structures change and new options become available. Today we can see how technology has allowed for many externalities (or commons problems) in agriculture to be internalized with examples such as biotechnology and GPS. The article linked above focuses on how engineering can contribute to this end.

Many of the ‘commons’ problems that Hardin cites in his article such as polluting the commons with insecticides and fertilizer have much been mitigated with modern technology and markets. See also - articles labeled 'coase theorem.'

REFERENCES:

Towards a Theory of Property Rights.
Harold Demsetz
The American Economic Review. Volume 57, Issue 2. May, 1967

The Problem of Social Cost
R. H. Coase
Journal of Law and Economics, Vol. 3, Oct., 1960 (Oct., 1960), pp. 1-44

The Tragedy of the Commons
Garret Hardin
Science, Vol 162 no 3859 Dec 13, 1968 p. 1243-1248

The Economics of Welfare
Arthur C. Pigou Macmillan and Co. London, Fourth edition, 1932. First published: 1920.
http://www.econlib.org/Library/NPDBooks/Pigou/pgEW.html

A Meta-Analysis of Effects of Bt Cotton and Maize on Nontarget Invertebrates
Michelle Marvier, Chanel McCreedy, James Regetz, Peter Kareiva
Science 8 June 2007:Vol. 316. no. 5830, pp. 1475 - 1477

Biotech Alfalfa: Who May Harm Who- An application of the Coase Theorem

From Drovers/Cattle Network "Using Property Rights Is A Trick Against Biotech Crops"

"Some politicians wrap themselves in the flag to justify their positions, and then there is Secretary of Agriculture Tom Vilsack appealing to farmers and ranchers' belief in "private property rights" to justify limiting biotech crop production"

Great article with a lot of great points. For the sake of this discussion, lets view biotech contamination of organic crops as 'pollution.' (despite the evidence that the risks are slight)

Traditionally when it comes to environmental pollution, the general philosophy was that 'the polluter pays'. A factory polluting the air or water should pay for the damages that are caused. In a much simpler case, if you build a house next to me and you don't like the smell of livestock waste coming from my property, the traditional philosophy would hold that you could have the government stop my operation. (or in this case, the biotech alfalfa grower pays for genetic contamination of organic alfalfa)

The economist Ronald Coase brought additional insight to this issue. 

1) yes it is true that my operation is harming you via air pollution. (odor)
2) however, in stopping me via government or legal intervention ( or taxing my waste production) you are harming me.

Coase says that the issue is that nonone owns the air that surrounds my livestock operation and your home. There then follows a dispute over how the air should be used- to absorb livestock odor, or to provide a scent free atmosphere in your back yard. Whenever the cost of one's behavior is not factored into a price at which a choice can be valued, I can harm you without compensating you for it. ( i.e. an externality exists)

However, if I own rights to the air, then I can choose to pollute the air. If you own rights to the air, then you can prevent me from polluting it. If noone owns the air, then it is first come first served or winner takes all.

That is not the end of the story though. What Coase emphasizes is that if I own the rights to pollute, you can pay me to limit my pollution i.e. buy those rights from me. I can then use the proceeds to alter my livestock nutrition, genetics, and management to reduce the odor my operation is causing. On the other hand, if you own the rights to pollute I can purchase those rights from you, or invest in technology that will allow me to continue my operation without violating your rights. I will do which ever is most optimal. This can be accomplished without major government regulation, or the arbitrary imposition of a tax.

The assignment of property rights and the potential for bargaining results in behavior that is changed or altered to account for the negative impact our choices have on others. This is the essence of what is known as the 'Coase Theorem"

However, if transaction costs are high, then bargaining may not take place. In that case, Coase emphasizes that any assignmnet of property rights should be based on which party can bear the externality at the lowest cost. Transaction costs can change based on changes in technology, which can also change how we define property rights. (for example, the technology that allows us to monitor CO2 emissions is what makes the concept of cap and trade possible).

How might this apply in the context of biotech alfalfa?  According to the Coase Theorem, it shouldn't matter who is assigned the rights in this case (giving the biotech producer the right to pollute, or giving the organic producer the right to stop neighbors from planting biotech). Both parties could bargain ahead of time to determine the optimal mix of biotech/organic production. Transaction costs should not be any higher than any normal land rental agreement.  Alternatively, one producer or the other could purchase insurance that would pay an indemnity in the event of contamination. (who would have to pay the premiums would depend on who has the right to pollute etc.) However, monitoring and enforcement costs could be high in terms of determining genetic contamination.

Another option would be a regulatory approach, limiting planting options for biotech producers.  This is what the Drovers article is critical of Tom Vilsack for. You could say it is enforcing property rights, but  only in a very arbitrary way, and unnecessary.

The agriculture industry offers some of the greatest examples of how technological advances and market forces lead to self correcting or internalization of externalities.  The adoption of biotechnology has led to reduced groundwater pollution, increased biodiversity, and reduced greenhouse gas emissions. All of which has occured in absence of taxes or government regulations. In the case of biotech alfalfa, a technological advancement that would trump legal or regulatory remedies would be use of 'terminator' gene technology.  Of course, that takes the power and prestige away from regulators, and empowers  property owners and market forces. In any case, what the Coase Theorem tells us is that there is no case for arbitrarily giving organic growers a trump card over those that want to use biotech alfalfa. The principle of polluter pays is not always optimal.