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Epidemics, Economics, and Externalities

The COVID-19 pandemic has highlighted the high costs that unchecked externalities – such as those resulting from people not wearing face masks – can impose on an economy and society. Economists must begin to examine how these costs can be reconciled with ordinary consumption.

NEW HAVEN – COVID-19 and its collateral damage continue to leave a trail of devastation around the world. Millions of businesses have closed, with many having no realistic prospect of reopening. Millions of people have lost their jobs. Millions are without health care. Some families are suffering from food insecurity for the first time. While the well-to-do can manage by using their savings, those who live from paycheck to paycheck, or hand to mouth, are suffering unfathomable hardships.

The pandemic also poses an almost impossible problem for traditional economic thinking. Most economists believe that the price mechanism will allocate resources efficiently, if not equitably, and that competition will maximize national income. But this assumes, crucially, that the activities of individuals or firms do not directly affect those of other agents, except through price signals in the market that indicate the scarcity of a product.

Economists refer to these effects as “externalities,” and divide them into external economies and diseconomies, depending on whether they are positive or negative. Such externalities prevent resources from being allocated efficiently.

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