Coasian Spike Solution
By G. Patrick Lynch
A few days ago I engaged in a thought experiment.
What might Gordon Tullock have suggested to address the problem of the rising number of younger people testing positive for COVID-19. I used Tullock’s spike, the example he gave of placing a spike in the middle of a steering wheel to “encourage” safe driving, as a way to frame a discussion of how we might think about young people being forced to internalize the cost of irresponsible behavior that is leading to more COVID cases.
I suggested one way of dealing with this issue might be to tax young people who get infected for irresponsible behavior. Now in the spirit of a less statist, more voluntary solution, let’s think about the problem differently. The term externalities gets attributed to Ronald Coase, in particular regarding the so-called “Coase Theorem.” In fact, that is a phrase that George Stigler coined in describing Coase’s work. Coase himself might have framed the problem COVID problem very differently.
In many of the examples that Coase uses, we tend to see the costs as only being externalized in obvious ways that fit our sympathies. I live downstream in a river. Someone builds a factory and begins polluting the river. The “externality” is typically the pollution that I now have flowing past my home, smelling up my yard and ruining my view. The pollution kills fish and poisons the underwater plant life. That’s the way we usually think about it. Blame and recompense is the way we approach it.
But aren’t I, through my anti-pollution bias, incurring a cost on you the factory owner? Rather than simply say, yes, the factory owner should pay the other people living downstream to compensate for the pollution, shouldn’t we also think about the factory owner employing people, creating a good that is presumably in demand and increasing social welfare? Coase probably would have preferred bargaining between the parties in dispute with a solution satisfactory to both.
Young people today aren’t the only ones not internalizing their externalities. They have suffered significant losses. They have forgone employment, educational, and social opportunities while facing almost zero risk of dying from COVID. They have seen trillions in debt added to the government’s balance sheet, which will have to be paid not by the older politicians who have pursued these policies, but by their own and future generations. They have now lived through two several economic disruptions – this crisis and the financial crisis of 2007-8. No wonder they have serious doubts about free markets and the American political economy!
Coase, rather than Tullock, might approach this problem differently. Can generations contract and bargain voluntarily to solve this problem? The elderly, the ones most at risk from COVID, are also coincidentally the richest age group in the United States. They receive massive subsidies from the government and have much more in savings than young people on average. Why can’t the elderly bargain to materially pay younger people for safer activity? Would a large scale scholarship program to younger Americans who wear masks and avoid social gathering (and don’t test positive for COVID) do the trick? How about more generous unemployment benefits for younger people who submit to regular testing and contact tracing paid for by a cut or at the very least a forgone COLA to Social Security?
The young are being asked to bear a tremendous material, social, economic, and educational burden at the moment. Older Americans are the ones who benefit most from this sacrifice. I smell a Coasian bargaining solution.