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Covid-19 as a Ramsey tax problem

Summary:
So many commentators cite lives, hospitalizations, and so on, as measuring the costs of the pandemic, and I understand that those are the rules of engagement, and furthermore I know that welfare economics is not the only relevant normative approach. Nonetheless let us try to apply welfare economics for just a moment.  In that framework what counts as a cost is deadweight loss (no sick pun intended, nor recursively). Look at it as a public finance problem. The total deadweight loss stems from the size of the “pandemic taxes” or “risk mark-ups” being applied to various human activities, then magnified by elasticities of adjustment, and quite possibly further social externalities from the collapse of critical scale (e.g., it is not just that movie-going might be dangerous, you can no longer

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So many commentators cite lives, hospitalizations, and so on, as measuring the costs of the pandemic, and I understand that those are the rules of engagement, and furthermore I know that welfare economics is not the only relevant normative approach.

Nonetheless let us try to apply welfare economics for just a moment.  In that framework what counts as a cost is deadweight loss (no sick pun intended, nor recursively).

Look at it as a public finance problem. The total deadweight loss stems from the size of the “pandemic taxes” or “risk mark-ups” being applied to various human activities, then magnified by elasticities of adjustment, and quite possibly further social externalities from the collapse of critical scale (e.g., it is not just that movie-going might be dangerous, you can no longer enjoy the movie with large crowds of people).

Many of the biggest “risk pandemic taxes” have been put on in-door socializing, many church activities, offices, elevators, live NBA games, etc.  You know the story.

If you say that people are overreacting to Covid, in essence you are admitting that those elasticities are high, and probably you think the resulting social externalities are high too.  And thus you are saying and indeed emphasizing that the costs of the pandemic are high.

There is a positive statement — “those elasticities are high!” — bundled with a normative statement — “I don’t think those elasticities should be so high!”  Being a human, your attention may be drawn to the normative statement. But what welfare economics hears is the positive statement about high elasticities and thus high deadweight loss.

Now you might believe that “talking people down out of their high elasticities” is a good strategy.  Maybe.  Still I ask you to consider whether this is generally how you approach economic problems.  How about?: “Don’t leave NYC just because the taxes are going up!  It will wreck the city.”  Would your focus be on talking people out of leaving, or rather on keeping taxes down or raising residence benefits correspondingly?

The “overreaction” advocates try to signal “the costs of Covid aren’t that high,” but translated into econspeak it is actually “the costs of Covid are really high.”

Unless they believe a great, great deal in the efficacy and corrective power of moral education. (Does Bryan?)

On top of that, keep in mind that the better informed and better educated people tend to be playing it safer, so the moral education you would have to deploy here would be very strange indeed — “don’t listen to what the other educated sources are telling you, listen to meYou are overreacting!

That is not where I wish to put my money or my time.

As a side point, note that in the 1968/1957 pandemics elasticities of adjustment were way lower, because you couldn’t switch things to Zoom, Amazon, and so on.  So those pandemics were closer to being a “lump sum tax” on human life and thus they were cheaper, and had lower deadweight loss, probably in per capita terms as well.  From the framework on welfare economics, that is.  The value of human lives was lower then too.

We all know that welfare economics is an inadequate “all things considered” moral framework.  But still it brings us insights every now and then.

The post Covid-19 as a Ramsey tax problem appeared first on Marginal REVOLUTION.

Tyler Cowen
Tyler Cowen is an American economist, academic, and writer. He occupies the Holbert C. Harris Chair of economics as a professor at George Mason University and is co-author, with Alex Tabarrok, of the popular economics blog Marginal Revolution. Cowen and Tabarrok have also ventured into online education by starting Marginal Revolution University. He currently writes the "Economic Scene" column for the New York Times, and he also writes for such publications as The New Republic, the Wall Street Journal, Forbes, Newsweek, and the Wilson Quarterly.

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