Does the Theory of Externalities Justify the Reaction to SARS-CoV-2?

by Don Boudreaux on January 18, 2021

in Country Problems, Current Affairs, Economics, Myths and Fallacies, Risk and Safety, Seen and Unseen

Here’s a long response to someone who is “convinced” that my opposition to the reaction to Covid “proves that [I am] incompetently trained as an economist.”

Mr. W___:

Thanks for your e-mail.

For a variety of reasons, I disagree that Covid-19’s contagiousness is sufficient reason to demand that the public – the overwhelming number of whom are healthy – change their behaviors or, even worse, be locked down or locked out. Your phrase “covid presents an externality” is not an incantation the use of which automatically implies that behaviors should change.

First, we humans are constantly spreading dangerous microorganisms to each other. We’ve done so for hundreds of thousands of years, and literally on each and every day of our existence as a species. On this front, SARS-CoV-2 is hardly unique. So to justify calls to change behavior requires something more – say, perhaps this virus being unusually dangerous, which brings me to my second point.

Second, the differential danger of Covid-19 for the very elderly is indeed quite high, but less and less so for people younger and younger. (A recent attempt in the pages of the New York Times to frighten young adults into believing they are at grave risk from Covid-19 is a mix of half-truths and statistical illusion.) And for children, Covid-19 is less dangerous than is the seasonal flu. (According to the CDC, “The risk of complications for healthy children is higher for flu compared to COVID-19.”)

If the contagiousness of a pathogen justifies shaming or forcing people into the likes of staying home, wearing masks, and remaining “socially distant,” why did we wait for the arrival of Covid-19? And do you propose that every flu season we lockdown, wear masks, and socially distance in order to protect children from what for them is the relatively more dangerous seasonal flu?

Third, as is explained in the single most important analysis of externalities ever written – Ronald Coase’s “The Problem of Social Cost” – externalities are bilateral. You can’t harm me unless I’m in a position to be harmed by you. This reality implies that there’s more than one way to reduce people’s chances of coming into contact with the coronavirus: You can take steps to reduce your risk of infecting me, or I can take steps to reduce my risk of being infected by you.

This reality, however, is ignored by those who call for the general population to lockdown and drastically change their behavior. Yet why presume that corrective action must be taken by what we can call “the spreaders” (nearly all of whom are in fact perfectly healthy) rather than only by those who are at especially high risk of suffering seriously from Covid (and by those who are especially fearful of it)? I can think of no good reason.

It’s possible that the optimal response is a combination of corrective actions by both groups. But given that Covid reserves its horrors overwhelmingly for an easily identified group – the very old and ill – it’s far more plausible that the best course is, and would have been from the start, what the co-authors of the Great Barrington Declaration call “Focused Protection.” This thoughtful approach explicitly recognizes Covid’s contagiousness while implicitly recognizing also Coase’s insight that externalities are always bilateral.

But the responses that humanity has actually gotten are the opposite of thoughtful. Instead we’ve gotten hysteria fueled by the absurd Imperial College model, and unwarranted fear spread virally through social and mainstream media and fed further by opportunistic government officials. (Why aren’t you complaining about this externality?) To grant to the panicked reaction a presumption of thoughtfulness, as if it’s a policy reasonably crafted to minimize the costs of an externality, is preposterous.

Fourth and finally, human interaction creates not only some risks for fellow human beings but also many benefits. When you dine at restaurants you help waiters and cooks earn their livings. You might even, simply by being a smiling face, enliven the restaurants’ atmosphere for other diners. When you go to work you help your co-workers earn their livings as you increase the supply of goods or services available to consumers. When you venture out, unmasked, for walks in the park you often run into friends and neighbors – and sometimes even strangers – who benefit from stopping to chat with you. By going downtown to dine or shop or hear live music you contribute to the city’s vibrancy – itself of great value to countless strangers.

If you’re going to analyze Covid and the response through the lens of externality theory, the positive externalities – in addition to other positive consequences – of human interaction (and of human freedom) cannot be ignored.

The above four points do not exhaust my reasons for disagreeing with those who insist that Covid’s contagiousness justifies the draconian response. But this letter is already too long, so I’ll leave matters there.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030


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