A fully functional market is beautiful. Also, it is rare. The economist’s main job is to find ways to make the market work well when the messy and real world breaks into the elegant model of textbooks.
Unfortunately, the pandemic provides a useful example of a market that is failing in a predictable and detrimental way. Failure is especially apparent in dozens of college towns across the United States, which are hotspots for the coronavirus.
Introductory Economics focuses on the “invisible hand of the market.” Independent actors maximize the public interest by pursuing their own interests. In this idealized world, the best thing government can do is to keep the free market out of the way so that it can work its magic.
But 95% of economics is about market imperfections and how the government corrects them.In fact, some market failures I need Government intervention for the invisible hand to do the job. Economic theory predicts when markets are likely to function with minimal intervention and when markets will fail without government involvement.
Pollution is an example of a market failure textbook. Manufacturers who send smoke into the air create what economists call “negative externalities.” Simply by doing what it does-making that product-the company hurt others. Pollution continues to flow, as pollution reduces the air quality of people living nearby and breathing, but the health of neighbors does not affect the profits that influence daily decision making in the factory.
The pandemic is facilitated by the ultimate negative externalities. The act of breathing itself can spread a fatal illness.
An important task of economic policy is to “price” externalities.The secret is to build External Automatically cost (or benefit) internal Choices about action. For example, the government may impose taxes on gases that reflect the harm that fossil fuels do to the environment.
The free market cannot solve externalities. Collective action is necessary to force people and businesses to internalize the costs that their own actions incur for others. There are many tools in this job, including taxes, regulations, social norms, and more.
To see what happens when the policy is executed Absent Set externality prices appropriately and look at university campuses across the country. Many have become the center of pandemic growth.
Universities, and college towns, are designed to maximize social interaction and create lifelong personal and professional opportunities. But in a pandemic, the university sought to use norms and punishments to prevent students from gathering, as brainstorming, conversation, networking, and socializing create negative externalities. They expelled offenders and trained their peers to model safe behavior.
It’s a difficult battle. Keeping students away from campus would have been a wise choice rather than struggling to keep them away.
However, the school faced an existential crisis as government funds evaporated and family income was squeezed. Universities earn much of their income from tuition-paying students who now want a social campus experience that is driving a pandemic.
Schools that chose not to open a campus were at risk of losing customers to the school they did. The school did what they could to survive, without the government telling (or paying) them to keep the students away.
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With so much income, the incentive to open the campus was fascinating. In the perfect market, it should work. Customers demand products, companies supply them, and the world gets better. But with negative externalities, this neat dynamics cannot maximize the common good.
There was no market force to force consideration of the external consequences of opening a campus at a university, as concerns about the risk of infection closed elementary schools in neighboring towns.
Coordinated government action was required to prevent the reopening of the campus. In fact, this could take many forms: grants to colleges that didn’t bring students to campus, tuition breaks for students who agreed to stay home, or fraternity. Complete government ban on communal living arrangements such as sorority and dormitories.
With a huge investment in testing, tracking and quarantine, some universities have reopened without spreading the virus to the community. Science has identified strategies that will allow universities to open safely. However, the power of the market does not consistently produce this result.
When the choice of one actor affects the well-being of another, such as infection or pollution, the invisible hand does not bring the best results to society. Each of us can do more to end this pandemic, but individual actions are neither the core of the problem nor the solution to it. Externalities require collective action.
Autonomy that fosters the individuality of an organization is a historical strength of American universities and contributes to research excellence. However, its great autonomy makes it impossible to respond in a coordinated manner. Schools moved quickly to keep campuses closed only where there was strong university surveillance and governance (for example, the California State University System).
Countries where governments have traditionally played a more active role in market formation have been more successful in changing behavior and curbing pandemics. A competitive free market works when individuals and institutions seeking their own interests converge and everyone does their best. If the university reopened, self-interested behavior instead led to predictable market failure. It is to promote the spread of the virus.
Sarah Cohodes is an associate professor of economics and education at Teachers College, Columbia University. Follow her on Twitter: @SarahCohodes..
Susan Dinalsky is a professor of public policy, education and economics at the University of Michigan. Follow her on Twitter: @dynarski..