Question

The recent Coronavirus has impacted our economy tremendously. can someone explain these topics to me regarding the coronavirus?

Externalities

a. explain the various externalities associated with social distancing (or violating social distancing rules)

b. discuss how social distancing might create externalities for the economy

c. draw a diagram showing an analysis of one of these externalities

thanks!

Answer 1

a.)  The rapid spread of COVID-19 has left pandemic-stricken countries with very little choice but to shut down their economies. The almost universal attempt to 'flatten the curve' and maintain hospital viability has been to enforce lockdowns and rigid forms of social distancing: 'keep home' is the mantra advocated by governments – from Wuhan to Milan, from Madrid to New York – to break the chain of contagion.  In many countries, campaigns to convince citizens to comply with social distancing have been put in place and popular actors, religious leaders, even football players have been mobilised to spread the message and raise awareness throughout the population. The goal is to persuade people to internalise the externality they would impose on the community by not reducing their mobility. Indeed, given the limited capacity of the state to enforce lockdowns on a large scale, persuasion seems crucial to achieving social distancing and reaping its potentially vast benefits in terms of lives saved (Greenstone and Nigam 2020, Stock 2020). In economics, an externality is the cost or benefit that affects a third party who did not choose to incur that cost or benefit. Externalities often occur when the production or consumption of a product or service's private price equilibrium cannot reflect the true costs or benefits of that product or service for society as a whole.

The internalisation of the externality created by personal mobility is likely to depend on citizens’ capacity to contribute to the ‘public good’. Indeed, contagion avoidance is a public good: any individual behaviour that limits contagion contributes to slowing the spread of the virus, thus lowering the probability of infection for all members of the community – a positive externality. Communities with higher levels of social capital tend to be better able to work collectively and provide goods to the public. The more political property, the quicker the spread of the disease, the greater commitment to social distancing. If political capital is powerful enough, it can cause social distancing at a very early stage of the epidemic, even without government involvement and persuasion. Looking at how mobility evolved between 21 February and 9 March allows us to test whether individuals in areas with higher civic capital were more likely to internalise the social cost of their mobility and voluntarily engage in social distancing even before government intervention. We are analyzing the evolution of individual mobility across Italian provinces over the past two months in order to shed light on the role of civic capital in fostering social distancing. We focus on Italy, a country that has been hit hard by the pandemic and is marked by broad and well-documented disparities between provinces in the civic capital (e.g. Putnam 1993, Guiso et al. 2004). Since liability or consequence for self-directed behavior lies partly beyond the self, an element of externalization is involved. If there are external benefits, such as in public safety, less of the good that be produced than would be the case if the manufacturer were to obtain payment for the external benefits to others. For the purpose of these statements, overall cost and benefit to society is defined as the sum of the imputed monetary value of benefits and costs to all parties involved.

b.)  A negative externality leads in this case to a consumption of social interaction that is too high for the society. Since the market cannot overcome this problem on its own, a market intervention becomes necessary. A (in economics) so called social planner that has everyone’s best interest in mind must implement policies making sure that social interactions are reduced to an optimal level. He can achieve this either by using the price mechanism to incentivize appropriate behavior or by implementing bans.   

The internalisation of the externality created by personal mobility is likely to depend on citizens’ capacity to contribute to the ‘public good’. Indeed, contagion avoidance is a public good: any individual behaviour that limits contagion contributes to slowing the spread of the virus, thus lowering the probability of infection for all members of the community – a positive externality. Communities with higher levels of social capital tend to be better able to work collectively and provide goods to the public.

c.) negative consumption externality