COVID-19 Pandemic: Externalities

Externalities are the positive or negative effects of consumption and production activities. This is a concept all high school microeconomics students would have learnt, including the four categories of externalities in all types of economies. ​ Well, the current spread of COVID-19 is an external cost (which has therefore been generated by negative externalities of production and consumption) and during the pre-lockdown phase the governments of nations all over the globe had a variety of options to tackle its spread such as: - Taxes on production or consumption activities that bolster COVID-19's spread - Increased Advertising and Awareness on COVID-19 - Government Regulations ​ Quite evidently, the last option was chosen: in the form of a lockdown. It prevented people from leaving their homes, thereby ensuring social distancing. What is the effect of this in the various markets? The diagram below shows it: Effect of Lockdown on the COVID-19 externalities:

The diagram to the left shows how the lockdown has affected the market supply and demand for production activities that cause the spread of the virus. However, there is a possibility of consumption activities also causing the spread of COVID-19 but, the effect on the market for them is quite similar. ​ In the diagram above, PQ represents the market equilibrium (the pre-lockdown equilibrium). Governments regulated the spread of the virus by ordering this lockdown (which has contracted the supply of any production activities that facilitated COVID-19's spread), therefore the supply curve shifted to the left. As a result, the quantity and price of those production activities decreased and increased respectively. Any high school microeconomics student would note that the marginal social costs curve is not present in the graph above. Well, this is because the size of the negative externality is unknown: symptoms of the virus range from a cold and fever to fatal incidents. As aforementioned, there is a chance of a negative consumption externality (this is because any form of social contact will cause a spread in the virus); however, the government regulated the supply. Therefore, I felt the representation would be more efficacious by displaying a negative production externality diagram. ​ Something else important to note is that the S1 curve is more inelastic than the S curve. Also, remember that elasticity is not based on the gradient of the curves - the IB HL Economics syllabus has a quantitative deduction of this - however, if the two curves intersect (which is also present in the diagram above) and are on the same graph then the steeper one will be more inelastic. Why has supply become more inelastic after the lockdown? Well quite simply this is because the government has set a restriction, and if the price does change (due to other factors, like demand), then the supply will change to a lesser extent because it cannot increase beyond the restriction. What is the use of this knowledge of the negative externalities of COVID-19 and governmental policies on it? Primarily, it is important to evaluate personal buying and purchasing levels based on this. Will governments become more lenient in their regulation of goods and services, thereby reducing their respective price? If so, buying levels should be kept at a low till this leniency comes into play. Is the ambiguity of the negative externality still too risky, making any nonessential purchases dangerous and ideally avoided? If so, then if the government does become more lenient in their regulation, it might still not be a good idea to purchase non-essential items, since we are unaware of the "precise" danger in doing so. Is the whole "panic buying" behaviour, a good choice or a bad choice? Even though understanding the externalities will not absolutely answer these questions, it will provide more clarity for a more effectual evaluation. Now, in the context of the long-run, thoughts of vaccinations are present. Vaccinations are an example of positive externalities of production - they create an external benefit of reduced changes of the respective disease spreading and greater life expectancy and quality of life. As soon as vaccinations for COVID-19 are introduced in the global system, governments of many nations will look to subsidise it in order to allow society to benefit from the external benefits. This again is another well-known concept in high school microeconomics, another important thing to note is that this kind of subsidy is referred to as a Pigouvian subsidy. ​

For all the high school (or more advanced) economics students out there, it is obvious the subsidy shifts the supply curve to the right and hopefully to the MSC curve. In conclusion, this practically explains the major "externalities" aspect of COVID-19 and all of the facets of this analysis will be easily comprehensible by all the high school students taking microeconomics as a subject.