A pedestrian walks past a sign encouraging the use of face masks in Washington, July 22.
Photo: michael reynolds/ShutterstockThe U.S. government’s disastrous failure in dealing with the coronavirus pandemic is a tragedy in many acts—from the Centers for Disease Control and Prevention’s initial errors with test kits and masking, to a know-nothing president who confuses magical thinking with thinking, even to craven political considerations when the pandemic was seen as a blue-state problem, and much more.
But one of the most important sources of government failure has received comparatively little attention—and it’s economic in nature.
Economists are often accused of being madly in love with free markets, and there is some truth to that. But one of the most important ideas we teach every economics student is that unfettered markets systematically get it wrong in the presence of externalities—cases in which the decisions of some people or businesses have important effects on third parties who have no say in the decision.
Externalities can be beneficial or harmful. A classic example of a beneficial externality is your neighbor’s beautiful garden. Although you planted nothing and pay no fee, you benefit daily. Free markets will systematically underprovide such activities.
A far bigger beneficial externality inheres in business spending on research and development. Firms that engage in successful R&D capture only a portion of the benefits of their innovations. The rest accrue to other companies and to consumers. So firms in free markets, left to their own devices, will invest too little in R&D. Governments around the world have long understood this problem, which is why they both subsidize R&D and perform it themselves.
Negative externalities are often more spectacular—and more worrisome. The classic example is pollution. If firms aren’t charged for the pollutants they spew into the atmosphere, they will emit too many. For over a century, economists have advocated a straightforward fix for this market failure: Tax polluters for the damages they inflict on others.
This analysis applies directly to climate change. CO2 is not a classic pollutant: It doesn’t burn your eyes, make you cough, or turn the skies gray. Rather, cumulative CO2 emissions heat up the atmosphere, causing climate changes of all sorts—most of them bad. Because this huge negative externality has been allowed to run rampant, we are gradually making the Earth an inhospitable place for humans.
What does all this have to do with the coronavirus? The Covid-19 pandemic creates a giant externality through contagion, and we aren’t doing nearly enough to contain it.
Absent a vaccine, our main defenses against this “plague” are eerily similar to what people did in the Middle Ages: Wear face masks and keep your distance from people who might be contagious. Americans afraid of contracting the disease are taking these precautions now—or at least some are. And that’s where the externality comes in.
Start with face masks. First, they cost money. Probably more important, they are uncomfortable to wear and make you look—how shall I say it?—a bit odd. Individuals who make decisions in their own best interests will balance these costs against the benefit of reducing their susceptibility to the virus—which, scientists tell us, is small. Based on this personal cost-benefit calculus, each individual will decide whether or not to wear a mask.
But wait. What about neighbors, co-workers, and passersby? Since wearing a mask benefits other people much more than ourselves, the beneficial externality from mask-wearing is huge. Consistent with that, several studies have estimated that the health gains from masking are large while the economic costs are small. A good deal. Yet basic economics tells us that self-interested decision makers will not wear masks enough.
More or less the same can be said about social distancing. We all know that keeping our distance is inconvenient (to say the least), especially if other folks aren’t cooperating. It certainly impedes economic activity. Yet no one is handing out rewards to people who distance properly, and few places are penalizing those who come too close. As in the case of face masks, individual decision-making in free markets will produce too little social distancing.
The standard remedy for an externality is a tax or a subsidy. But this is impractical for masking or distancing. The best compromise may be an enforced mandate that people wear masks and practice social distancing in public. Enforcement would be difficult, but it’s been effective in some states and many European countries.
Here, however, we hear thunder on the right—even from some Republican governors—that requiring either masking or distancing infringes on individual liberty. Well, sure. So do red lights and speed limits—which, like masks, save lives. It’s no exaggeration; the anti-maskers are killing people.
Mr. Blinder is a professor of economics and public affairs at Princeton University and a former vice chairman of the Federal Reserve.
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