COVID-19, colloquially known as the coronavirus, is at the forefront of everyone’s minds. The new virus was first discovered in December 2019 in Wuhan, China. Over the past four months, COVID-19 has spread throughout the globe. While the largest number of cases was previously in China, the United States now has the largest number of cases worldwide, and it seems that the situation here is going to get worse before it improves.
Although nobody is immune to COVID-19, some groups are at higher risk of serious complications or death. Individuals over age 60 and those with preexisting health conditions, such as asthma, diabetes, or compromised immune systems, are particularly vulnerable.
COVID-19 and the effects of its presence have infected every facet of our “normal” lives, including work and school, social and recreational activities, and even simply shopping for groceries or going out to eat. Since this is an economics blog, you might think that we are going to discuss the connection between COVID-19 and economics in terms of unemployment or business activity. Rest assured, the RESI team will be covering that topic in other posts. In the meantime, I will use economic theory to explain some of the reactions we’ve seen to the pandemic.
Firstly, COVID-19 (or the threat of COVID-19) has affected consumers’ tastes and preferences. As concern over contracting COVID-19 has increased throughout communities, many people are buying more hand sanitizer, tissues, face masks, and disinfecting wipes than normal. Since companies cannot instantaneously increase their manufacturing capacity to match the change in demand, this change in consumer behavior has led to a shortage. Consequently, people who want or need to buy these supplies cannot always obtain them.
Individual tastes and preferences extend beyond purchases—decisions about what to do and when/where to do it are also a factor. While most decisions primarily affect the individual (for example, deciding to dye my hair blue or choosing between reading or scrolling social media before bed), some actions have impacts on other people. If I decide to blast loud music from my apartment at 3 AM because I want to have a dance party, my downstairs neighbors are likely going to notice. This discrepancy between the personal (or private) effects I experience and the broader effects that are external to my person can be quantified as an externality. (For a deeper discussion of externalities, check out my blog post on vaccines.) While the personal costs and benefits to me favor continuing with my normal routine, if I think about the full social costs and benefits of my actions, I might make a different choice.
When an action or intervention works to shift social costs back onto the person making the decision, economists refer to this as internalizing the externality. One recent example of this is Governor Hogan’s executive orders regarding social distancing. Since the first community transmission case of COVID-19 was confirmed on March 12, Hogan has implemented increasingly stringent restrictions on activity in the state. These restrictions have ultimately led to a requirement that Maryland residents stay in their homes unless they are completing an essential activity, such as grocery shopping or exercising outside while maintaining social distance. Employees going to work at an essential job, such as a hospital or utility company, are also exempt. Not following this executive order is a misdemeanor punishable by either jail time and/or a $5,000 fine.
We can think of this legal penalty as an additional cost that an individual has to bear for unnecessarily going out in public during the pandemic. It accounts for the difference in cost to the person who goes outside for nonessential reasons, and then potentially breathes/coughs on people—it internalizes the externality. In this case, the externality is the cost to society of the continued spread of the virus, resulting in illness/death, adverse mental health effects, lost interactions and experiences, and lost jobs and livelihoods.
In light of the global pandemic, officials have been encouraging people to engage in some simple behaviors to help reduce the spread of COVID-19. These include washing your hands, covering sneezes and coughs with a tissue, avoiding large groups, and staying home, especially if you’re feeling ill. While these recommendations are nothing new and are part of basic hygiene, the current situation is a good reminder that personal actions can impact society. Everyone has a role to play in slowing the spread of coronavirus. The better we can maintain our social distance and follow public health guidelines, the sooner we can flatten the curve.