Voluntary or mandatory? An economic perspective on the Corona debate

There has been a vigorous debate here in Germany since the beginning of the pandemic if measures to contain the pandemic should be primarily voluntary or mandatory. Should wearing masks be obligatory? Could cultural events be happening? Should journeys be allowed? Any discussion had one question in common: Should each individual behave in autonomous responsibility or should politics limit freedom for everybody? 

I guess, in one way or another this debate took place all around the world. Right now, there are quite a lot of legal provisions to contain the pandemic. In Germany, we are still in the middle of a second lockdown that started in November 2020. Schools, the retail and cultural sector and restaurants are mainly closed (at least until February 14). And meeting people in- or outside is strictly limited to one person from another household. After more than two months of lockdown, it took till these days that the number of infections is declining slowly; but the death toll is still high, around 1000 people a day die of Covid_19.

The latest constraint: Working remotely (called “Home office” in Germany) is now mandatory. Labour Minister Hubertus Heil (from Social Democratic Party of Germany, short: SPD) put an ordinance into effect obliging companies to make “Home office” a right, as long as it’s possible. It became effective on January 25 and is limited till March 15 – until further notice. 

There are many obligations to contain the pandemic. Some say this is a sign for a dysfunctional society. Because many people behave irresponsible, mandatory measures are necessary, it is said. As an economist, I doubt this. It is probably the other way around. Legal obligations are required to keep society alive and functioning. Here is why.  

A brief digression at the beginning. 

A pandemic is, in a way, the result of a market failure. Market failure is an economic term that describes how the allocation of goods and services leads to a net loss of economic value. This market failure can have various reasons. In this case, so-called negative externalities are relevant. The concept of externality was first developed by economist Arthur Pigou in the 1920s. Air pollution from motor vehicles is an example of a negative externality. The costs of air pollution for the rest of society are not compensated for by either the producers or motorised transport users. To sum up: Negative externalities are a form of costs imposed on a third party who has not agreed to incur that cost.

What does that have to do with the Corona crisis?

Market failure can also occur in implicit markets such as elections – or a pandemic. In this way, negative externalities are caused by gathering and spreading the virus. The consequence: The social costs of meeting other people are much higher (because of the virus’s potential spreading to others) than the private costs (of getting infected). Each individual makes the correct decision for himself, but those prove to be the group’s wrong decisions. 

If the market fails, the state can intervene, it can cure the market failure, for example, by an obligation to wear masks or by closing restaurants (to reduce gatherings).

But why – as I argue – can obligations be better than appealing on each individual’s responsibility? 

Because otherwise unsocial people win. 

Take minister Heil’s home office ordinance as an example: If working remotely is voluntary, only these companies investing in remote infrastructure and sending their employees home help contain the pandemic. They carry part of the burdens of social costs. Companies who don’t, gain twice: from fewer infections (because more people work from home, even not their employees) and from a comparative price advantage (they don’t have infrastructural costs). In the long run, antisocial behaviour prevails.

There are a lot of social fields where this problem is similar. In taxes, for example. Fair taxation is indispensable. If tax avoidance is widespread, honest tax paying companies are squeezed out of the market because they can’t keep up. They are too expensive. Also, if it is easy to avoid environmental requirements, the polluter has a price advantage and thus a competitive advantage.  

Regulatory frameworks are significant in general, so they are in a pandemic. That doesn’t mean that the voluntary principle could make sense. The market failure argument favouring obligations is only one argument in this debate, there are others supporting voluntariness. But the market failure argument is a strong one because if you repair market failure by obligations, it leads to better outcomes and prevents honest people eventually lose out.

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