In economics, a negative externality is a cost that two transacting parties impose on a third party, and for which the transacting parties pay no compensation. Economic theory suggests that if the transacting parties can ignore that cost, they have an incentive to engage in too many transactions compared to what they would have done had they been forced to take the cost to the third party into account. Hence, under certain conditions, the government may be able to improve social welfare by restricting the number of transactions, for example, by taxing them, regulating them, etc. Those who favor shutting down non-essential business in response to the pandemic seem to be making a similar argument. We are told that people who engage in in-person transactions put at risk not only themselves but also the healthcare workers who will have to treat them if they get sick. Hence, that choice should be taken away from them. The extreme version of the argument suggests that people who choose to engage in in-person transactions should have no expectation of receiving treatment if they get sick. But does this and other arguments that invoke negative externalities hold water?
Let us start with whether a negative externality is, in fact, imposed on healthcare workers. The definition in the first paragraph and a brief analysis suggest that it is not. If I go to a bar and contract any sickness, by itself this transaction does not impose a risk on any healthcare worker. The risk comes from the healthcare worker treating me. But this a separate transaction that involves a risk that healthcare professionals implicitly agree to undertake when they choose to enter this line of work. It is also a risk for which they are compensated. There is no externality here. Imagine if police officers wanted to impose a curfew on people living in high-crime neighborhoods to reduce the risk from having to enforce the law there. Imagine if they refused to respond to a call because the victim was acting risky by choosing to walk alone late at night. Obviously, anyone who is unwilling to undertake the risk associated with being a police officer should not become one. The same applies to healthcare workers. And the argument of using lockdowns to protect healthcare workers is weakened further by data showing that, at least in New York, the COVID infection rate among those in healthcare is lower than that of the general population (12% versus 14%), which suggests that healthcare workers can mitigate the risk by properly using Personal Protective Equipment (PPE).
A more substantive case can be made that a person who engages in in-person transactions imposes a negative externality on those who come into contact with them accidentally, for example, because they live in the same apartment complex. As well, because of how our healthcare system is structured, a patient may pass some of the cost of treatment to the insurance company, or to taxpayers when the government picks up the bill. While these observations are valid, it is important to remember that according to economic theory, the optimal level of a negative externality is not zero if there are strong enough benefits associated with the activity causing the externality. Pollution is another example of a negative externality, but banning it would require us to give up so much of human activity as to seriously compromise the standards of living and perhaps the survival of billions of people. Instead, the prescription is to make those responsible for the external cost pay for it. Doing so motivates them to engage in only those transactions whose benefit is large enough to justify the cost not only to themselves but also to others. But is this not the case already? Someone who chooses to keep their business open will pay a penalty proportional to their volume of business through the sales, income, and other taxes. A person will want to work only if the benefit from working exceeds the cost of their time and risk to their health as well as the tax. For the externality argument to stick, one would have to show that the tax on work is less than the expected cost that working imposes on others, and it is not at all clear that this is the case. As well, we should consider that there is also a positive externality from someone getting sick, to the extent that they develop immunity to the virus thereby contributing to herd immunity. For example, if you stayed at home for a month and during that month everyone else contracted the virus and either developed immunity or died, you could then exit your home without fear of contracting it. You would have benefited from other people's suffering free of charge.
This, of course, does not mean that a lockdown or a shutdown are never justified. When health facilities are overwhelmed, the marginal cost (cost or treating one more patient) can get very high. Hence, it may be reasonable for a government to enact temporary measures to slow down the rate of infection and buy itself time to increase the capacity of the healthcare system. But the key word is "temporary". Once healthcare facilities operate well below capacity, there is no reason why the government should prohibit in-person transactions instead of allowing people to choose for themselves. This is important to remember given that the political incentive for many governors is to minimize the grim statistics of the pandemic, especially since the economic cost from a lockdown to their state may be mitigated by any assistance the state and its residents receive from the federal government. Claiming that one saved people's lives, even of those who did not want to be saved, makes a good political slogan, but it is not sound economics. Loggers, fishers, roofers, coal miners, undertake an unusually high risk when they decide to go to work. Yet we don't shut them down because their accidents reflect negatively on us. Staying open during a pandemic should not be any different.
Let us start with whether a negative externality is, in fact, imposed on healthcare workers. The definition in the first paragraph and a brief analysis suggest that it is not. If I go to a bar and contract any sickness, by itself this transaction does not impose a risk on any healthcare worker. The risk comes from the healthcare worker treating me. But this a separate transaction that involves a risk that healthcare professionals implicitly agree to undertake when they choose to enter this line of work. It is also a risk for which they are compensated. There is no externality here. Imagine if police officers wanted to impose a curfew on people living in high-crime neighborhoods to reduce the risk from having to enforce the law there. Imagine if they refused to respond to a call because the victim was acting risky by choosing to walk alone late at night. Obviously, anyone who is unwilling to undertake the risk associated with being a police officer should not become one. The same applies to healthcare workers. And the argument of using lockdowns to protect healthcare workers is weakened further by data showing that, at least in New York, the COVID infection rate among those in healthcare is lower than that of the general population (12% versus 14%), which suggests that healthcare workers can mitigate the risk by properly using Personal Protective Equipment (PPE).
A more substantive case can be made that a person who engages in in-person transactions imposes a negative externality on those who come into contact with them accidentally, for example, because they live in the same apartment complex. As well, because of how our healthcare system is structured, a patient may pass some of the cost of treatment to the insurance company, or to taxpayers when the government picks up the bill. While these observations are valid, it is important to remember that according to economic theory, the optimal level of a negative externality is not zero if there are strong enough benefits associated with the activity causing the externality. Pollution is another example of a negative externality, but banning it would require us to give up so much of human activity as to seriously compromise the standards of living and perhaps the survival of billions of people. Instead, the prescription is to make those responsible for the external cost pay for it. Doing so motivates them to engage in only those transactions whose benefit is large enough to justify the cost not only to themselves but also to others. But is this not the case already? Someone who chooses to keep their business open will pay a penalty proportional to their volume of business through the sales, income, and other taxes. A person will want to work only if the benefit from working exceeds the cost of their time and risk to their health as well as the tax. For the externality argument to stick, one would have to show that the tax on work is less than the expected cost that working imposes on others, and it is not at all clear that this is the case. As well, we should consider that there is also a positive externality from someone getting sick, to the extent that they develop immunity to the virus thereby contributing to herd immunity. For example, if you stayed at home for a month and during that month everyone else contracted the virus and either developed immunity or died, you could then exit your home without fear of contracting it. You would have benefited from other people's suffering free of charge.
This, of course, does not mean that a lockdown or a shutdown are never justified. When health facilities are overwhelmed, the marginal cost (cost or treating one more patient) can get very high. Hence, it may be reasonable for a government to enact temporary measures to slow down the rate of infection and buy itself time to increase the capacity of the healthcare system. But the key word is "temporary". Once healthcare facilities operate well below capacity, there is no reason why the government should prohibit in-person transactions instead of allowing people to choose for themselves. This is important to remember given that the political incentive for many governors is to minimize the grim statistics of the pandemic, especially since the economic cost from a lockdown to their state may be mitigated by any assistance the state and its residents receive from the federal government. Claiming that one saved people's lives, even of those who did not want to be saved, makes a good political slogan, but it is not sound economics. Loggers, fishers, roofers, coal miners, undertake an unusually high risk when they decide to go to work. Yet we don't shut them down because their accidents reflect negatively on us. Staying open during a pandemic should not be any different.
