COVID-19 Update: Externalities During a Pandemic

Supports:  Hubbard/O’Brien, Chapter 5, Externalities, Environmental Policy, and Public Goods; Essentials of Economics Chapter 4, Market Efficiency & Market Failure

Apply the Concept: Should the Government Use Command-and-Control Policies to Deal with Epidemics?

Here’s the key point:   To deal with the negative externalities from an epidemic, a command-and-control policy may be more effective than a market-based policy.

The Externalities of Spring Break during the Coronavirus Epidemic

            When we think of negative externalities, we are typically thinking of externalities in production.   For example, a utility company that produces energy by burning coal causes a negative externality by emitting air pollution that imposes costs on people who may not be customers of that utility company.   During the coronavirus epidemic, some public health experts identified a significant negative externality in consumption.

            The coronavirus epidemic became widespread in the United States during March 2020—when many colleges were on spring break.  By mid-March several states including California, Washington state, and New York closed non-essential businesses such as hotels and restaurants, as well as parks and beaches. But many hotels, restaurants, and beaches in spring break destinations such as Florida remained open and   were packed with college students.  Many students realized that because of the crowds, they might catch the virus.

Why take the risk? There are two possible explanations.   First, many students likely agreed with an American University senior who was quoted in the Wall Street Journal as saying, “It’s a risk to be down here with crowds … [but] it’s my last spring break. I want to live it up as best I can.”  Second, some spring breakers were relying on early reports that people in their 20s who caught the virus would experience only mild symptoms or none at all.  But even young people with mild symptoms could spread the virus to others, including people older than 60 for whom the disease might be fatal.

            So, in March 2020 there was an externality in consumption from college students taking spring break beach vacations because people in large crowds spread the virus. In other words, the students’ marginal private benefit from being on the beach was greater than the marginal social benefit, taking into account that being on the beach might spread the virus.

            The following figure shows the market for spring break beach vacations. The price of a vacation includes transportation costs, renting a hotel room, meals, and any fees to use the beach.  Demand curve D1 is the market demand curve and represents the marginal private benefit to students from vacationing on a crowded beach during spring break.  But spring breakers don’t bear all the cost of potentially contracting the coronavirus by being on a crowded beach because the cost of their spreading the virus is borne by others. So, there is negative externality from vacationing on the beach equal to the vertical distance between D1, which represents the marginal private benefit, and D2, which represents the marginal social benefit, including the chance of spreading the virus by contracting it on a crowded beach.

Because of the externality, the actual number of people taking spring break beach vacations in March 2020, QMarket, was greater than the efficient number, QEfficient.  In Section 5.3 of the Hubbard and O’Brien textbook, we show that when there is an externality in production, a tax equal to the per unit cost of the externality will result in the efficient level of output because the tax causes firms to internalize the externality.  In a similar way, a tax on spring break beach vacations equal to the per unit cost of the externality would shift the marginal private benefit curve, D1, down to where it became the same as the marginal social benefit curve, D2.  By leading spring breakers to internalize the cost of the externality, the tax would cause the market quantity of beach vacations to decline to the efficient quantity, QEfficient.

In practice, however, imposing a tax on people taking a beach vacation would be difficult for two key reasons: (1) In March 2020, there were many aspects of the coronavirus, including how it spread and its fatality rate, that made calculating the value of the negative externality difficult, and  (2) collecting a tax on the many spring breakers crowded on beaches would have been administratively difficult. In the face of these factors, governors and mayors used the command-and-control approach in March of closing beaches, hotels, and restaurants rather than the market-based approach of levying a tax.

Sources: Arian Campo-Flores and Craig Karmin, “The Last Place to be Hit With Coronavirus Worries? Florida Beaches,” Wall Street Journal, March 21, 2020; Aimee Ortiz, “Man Who Said, ‘If I Get Corona, I Get Corona,’ Apologizes,” New York Times, March 24, 2020; and Ryan W. Miller, “’If I Get Corona, I Get Corona’: Coronavirus Pandemic Doesn’t Slow Spring Breakers’ Party,” usatoday.com, March 21, 2020.

Question 

According to news reports, some college students on spring break in March 2020 were unaware that partying on the beach put them at risk of contracting the coronavirus. Many also assumed that no one younger than 30 was at risk of becoming seriously ill from the virus, although, in fact, the virus did kill people in their 20s. Suppose that every student on spring break were completely informed about the risks of partying on the beach.  Using the figure above, briefly explain how each of the following would have been affected. Draw a graph to illustrate your answer.

a. the demand curve, D1

b. the demand curve, D2

c. QMarket

d. QEfficient

e. PMarket

f. PEfficient

g. Size of the deadweight loss

Instructors can access the answers to these questions by emailing Pearson at christopher.dejohn@pearson.com and stating your name, affiliation, school email address, course number.

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