As with any discipline, organization, or activity, there is a surrounding vocabulary that describes the underlying purpose. In economics, a general definition of economics concerns the allocation of scarce resources centering on individuals making choices that consider benefits and costs. But even this simple starting point evolves into a complex set of terms and theories that attempt to explain economic systems adapting to changing technology, social norms, and institutional constraints and systems. The approach usually taken is to narrow the focus to a particular problem or situation and use a particular theory and current and recent information to perform an analysis that provides a pathway to explanation and prediction.
Most conflicting economic reasoning results from different assumptions, theory, or information. One common misunderstanding of the benefits/costs approach to decision-making is the exclusion of externalities in the process. An externality is an action by someone that has an impact on another’s well-being. The impact could be positive thus increasing well-being or negative and decreasing well-being. Some classic examples of negative externalities are pollution, a nearby barking dog at midnight, and a clunker that spews oil behind its trail. The recent vaccination discussion presents a case study in a positive externality situation. It can be argued that vaccination provides a positive externality since not only does it protect the vaccinated individual but also leads to lower social costs (less hospitalizations and death and herd immunity). In fact, a market approach to this positive externality is rapidly, but not universally, being enacted as some companies are increasing health insurance premiums for unvaccinated employees. This is a classic case of the company accounting for the negative externality associated with the unvaccinated employee. Likewise, some entities (some universities and state governments) are providing incentives to encourage vaccination, a typical response to positive externalities.
Understanding externalities sometimes leads to policies that appear to be coercive and authoritarian. But disregarding the externality of a situation can result in an inefficient allocation of resources since the unvaccinated, for example, is not incurring the total costs (internal and external) of their actions. Usually, externalities are addressed by government-imposed regulations limiting quantity produced or market-based approaches such as taxes, subsidies, or tradable permits. With respect to the vaccination issue that is affecting an entire population and not just juveniles, the primary approach has been to use market tools to encourage vaccination. It will be interesting to see what occurs once a children’s vaccine becomes available. Will the COVID vaccine be added to the list of mandatory vaccines required for attendance at public schools? Another hard decision for school boards across the nation as they navigate a volatile political environment making the most difficult political position in the United States even more difficult.
Steve Turner is Director Emeritus of the Southern Rural Development Center at Mississippi State University.
