Externality and COVID-19

Negative infectious disease externalities are less prevalent in the absence of government intervention and less costly to society than is often supposed. That is so for three reasons. (1) Unlike externality-creating behaviors in many classical externality contexts, such behaviors are often self-limiting in the context of infectious disease. (2) In market economies, behaviors that may create infectious disease externalities typically occur at sites that are owned privately and visited voluntarily. Owners have powerful incentives to regulate such behaviors at their sites, and visitors face residual infection risk contractually. (3) The social cost of infectious disease externalities is limited by the cheapest method of avoiding externalized infection risk. That cost is modest compared to the one usually imagined: the value of life (or health) lost to the disease if government does not intervene. We elaborate these arguments in the context of the COVID-19 pandemic.