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The Arrow Points to Coase...

My boyfriend, a gentleman and a scholar, recently said to me that economics teaches us that if we just leave people alone, they will figure it out. The Coase Theorem reiterates this concept: regardless of who the initial property rights are assigned to, the individuals in question will negotiate the terms of the agreement and still reach the optimal outcome.

Kenneth Arrow, essentially explains the Coase Theorem as it relates to immunizations (1963): "In the medical field, the obvious example [of marketability of goods and services relevant to costs and utility] is the spread of communicable diseases. An individual who fails to be immunized not only risks his own health, a disutility which presumably he has weighed against the utility of avoiding the procedure, but also that of others. In an ideal price system, there would be a price which he would have to pay to anyone else whose health is endangered, a price sufficiently high so that the others would feel compensated; or, alternatively, there would be a price which would be paid to him by others to induce him to undergo the immunization procedure."


A caveat: this is only the case when transactions costs are low; that is, when it is of relative ease for all relevant individuals to get together and come to a conclusion. Obviously, in the case of Covid-19 and the much-debated vaccine, the transactions costs are significantly higher.


On the other hand, the nature of such harm is bilateral: meaning that the harm one inflicts upon another can only occur if the individual puts himself in harm's way. To be clear: I am not assigning blame (and a good reading of Ronald Coase's "The Problem of Social Cost" will clarify that regardless of to whom we assign "blame", the party who values the action (or inaction) the most will pay to exercise (or cease) the right to do so.)


Let's play this scenario out. Bill doesn't want the vaccine. Bill has calculated his risks, costs, and benefits (to himself) and has decided that he is not willing to take the vaccine. What Bill has not, however, considered in his mental calculation, is the total social cost of his potential spread of the virus. Accounting for others who are potentially negatively impacted by Bill's decision to stay unvaccinated, are his actions a net cost to society? Probably. Is it feasible for Bill to do his mental calculus to consider all others in his decision-making? Probably not.


At the same time, Bill knows how this decision affects others. But his own reluctance to do so outweighs, for him, the sole decisionmaker in this case, the costs to others. And that's okay, too. He is the one who carries the burden of any negative impact from vaccination. Economic theory indicates that agents rationally work in their own self interest (not to be confused with selfishness, and not to say the two are mutually exclusive).


Now let's take a look at Jane. Jane is vaccinated. She weighed the costs and benefits, just as Bill did, and decided receiving the vaccine was the best decision for her. Jane may or may not have also considered the overall benefit to others as part of her decision; regardless, Jane's cost-benefit analysis (her pro/con list) led her to choose vaccination. It is of less concern generally why Jane chose to get the vaccine as she is on the "moral" side of the issue, in which case the perceived total social benefit of her decision outweighs the costs.


Jane wants Bill to get the vaccine. Is it right for anyone to impose upon Bill their own fears, when they can also take the steps to minimize their own risk? What level of moral duty do we have to our neighbors? How much discomfort, physical and otherwise, are you willing to undertake to minimize the risk to a stranger? Does this change if it's a friend?


Coase would say that it is the "least-cost" avoider who should take on the actions to prevent, in this case, potential transmission of the disease. That is, the person for whom it is least costly should take the action of preventing harm. Is it reasonable for Jane to expect Bill to get a vaccine that even at zero price -- not to be confused with zero cost, but that is a conversation for another day -- he has chosen not to get, to do so, to further minimize her risk? Again, the nature of harm is bilateral: Bill could get the vaccine. But Jane, if she is very worried, could just wear a mask to the store, if Bill is a random passerby. If Bill is a friend, Jane could minimize her time with him. Maybe intentional social distancing from friends would eventually be enough of a nonpecuniary cost to Bill that it later induces him to get vaccinated, if only to resume regularity of life again.


So, does Bill's cost outweigh Jane's fear? How do we measure that? (Money. How much is Bill willing to accept to be induced to take the vaccine? How much is Jane willing to pay? And vice versa: how much is Bill willing to pay Jane to alleviate her risk? How much is Jane willing to accept to be exposed to Bill?)


This idea fascinates me.



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