Externalizations, Pandemic and Freedom

Deputy Director of the Master's Degree in Economics and Political Science at ESEADE.

LOS MERFCADOS – Should the government restrict freedom to avoid contagion?

In economics it is said that there are externalizations when a person performs an activity that influences the welfare of a third party who is not paid or compensated for this effect. If the impact on the third party is negative, it is known as a negative externality. If it benefits you, it is called a positive externality.

A typical case of negative externality is environmental pollution, where the toxic waste from a factory causes damage to third parties without being compensated a priori. At the same time, the positive case is exemplified with education, since the educated person benefits those who deal with it, without having paid for that education.

Externalities are, for a broad consensus of economists, one of the main reasons why the free market can be restricted or intervened. It is argued, for example, that when there are negative externalities, the activity that generates them will be “too abundant” if the free play of supply and demand is left to act. On the contrary, it is suggested that if there are positive externalities, there will be “too little” of that activity.

In these cases, then, the state could tax activities that have negative externalities and subsidize those that have positive externalities. Other variants, of course, are the regulation of the activity or the state provision of the service, as in the case of public schools.

Now, does all externality require state intervention? More specifically, does the existence of any externality demand that the government set itself by restricting the free interaction of people?

The answer is negative. We live daily with a myriad of externalities where the government takes absolutely no role.

For someone to bathe and perfume himself in the morning generates a positive externality on all those who accompany him on his train journey to work. However, the state does not subsidize soaps or perfumes, nor are there general rules of personal hygiene.

In another vein, although there are regulations and regulations against annoying noise, most of the time a neighbor can simply ask the other to lower the volume of their music a little, and the solution to the negative externality comes hand in hand of a negotiation.

Something similar happens in the case of contagious diseases, such as seasonal flu. No one initiates a case for damages against a co-worker who they suspect infected them with the virus. He simply goes to work, assumes the risk of an eventual contagion, and then returns after several days of high fever, but without resentment or suspicion.

It is believed that the influenza virus attacked you, not your colleague.

Contagion as an externality

This situation is particularly relevant to what we want to analyze today. It is that one of the arguments that could be behind the restriction of freedom that the government imposes on citizens to prevent the spread of Covid is that contagion is a negative externality.

Let’s imagine the following scenario. Josefina is in a bar having a coffee with croissants for breakfast. At the next table is Claudio, sipping an orange juice while reading the Clarín newspaper. If it were the case that Josefina sneezes near Claudio and she was Covid +, Claudio would probably contract said disease. In that bar, Josefina’s free activity will have had a negative impact on Claudio, without him being compensated for it.

The economic analysis suggests that the failure to compensate for the damage will cause there to be too many “contagioners”, or too much negligence… And a practical-political conclusion is that the state must intervene by restricting Josefina’s freedom. Now, as it is very difficult operationally to prohibit sneezing to Covid + individuals, that rule will be replaced by the mandatory confinement, for 15 days, of Josefina and anyone in her situation.

This analysis, which may sound reasonable to many observers and analysts, presents multiple problems. Namely:

1- In the first place, we do not know the damage caused to Claudio. That will largely depend on your age and your comorbidities. From what is known to this day, Claudio could potentially die from Covid, or go through the disease without any symptoms. In the latter scenario: what damage had to be repaired?

2- Second, we do not know a priori who is infected and who is not. In fact, in an overwhelming number of cases not even the “contagion” himself is aware of being a carrier of the virus. It is one thing to restrict Josefina’s freedom once we know that it is Covid +, another to restrict everyone’s “just in case.”

3- Third, even if Josefina were aware of her situation, it is possible that she will notify the bar, the bar will notify all its customers, and they are the ones who make the decision to stay there or not. The situation seems unreal, but it is relevant to the extent that governments during these months have been emphatic in prohibiting “social gatherings” even in private homes. Furthermore, if Josefina, knowing of her condition, were to wear a chinstrap and distance herself from others, she would be doing everything possible not to generate the externality. That is to say, in fact she would be “internalizing” it, which is what is always sought in these cases.

4- Fourth, what responsibility does the infected bear in all this?
This last point is especially relevant. Is that one of the possible solutions when one finds that she lives with a “bad neighbor” is to sell the property and move, or change the rent.

In this case, this situation is also possible. If Claudio did not want to get it from Josefina, she could have avoided going to the bar. Here it could be argued that Claudio does not have the knowledge of whether another client of the establishment is, or not, Covid +. But the situation does not change significantly: faced with the risk that there are infected individuals, one is the one who can decide whether or not to expose himself to said risk.

Thus, it could be said that Claudio contracted Covid because she sat close to Josefina, but that she could well have avoided any such contact. When the government forced us to “stay home,” in fact, it generalized an extreme version of this risk-averse individual decision to everyone.


Now, all this is a nice theoretical analysis that tries to describe the problem of applying the concept of externalities and its state resolution to the case of Covid. However, in the real world contagious diseases are not seen as negative externalities subject to penalty or state intervention.

Going back to the case of seasonal flu, nobody accuses another person of getting the flu. And it’s not that there is no harm. In a smaller proportion according to known data, the influenza virus can also kill.

Another similar example is that of the HIV virus. When a person contracts HIV – a virus that has taken the lives of no less than 30 million people throughout its existence – they do not initiate a criminal case against their partner, but at the most they will reflect on the use or not of the preservative.

In this sense, experts suggest that responsibility is fully individual, being that one always has the option of using widely known prevention methods, including to interact with other infected and contagious individuals.

With Covid the situation is similar. We can, yes, consider that there are negative externalities that are often not completely internalized. However, none of these other conclusions follow:

that you have to internalize them all, that the generator of the externality is an aggressor, that the government should intervene by restricting freedom.

Finally, it is still much less followed, that even if there is intervention, it is as harsh and incredibly exaggerated as it was not only in Argentina, but in an overwhelming majority of countries on a global scale.