COVID-19 and the Principles of Economics

Several fundamental principles in economics help enhance our understanding of COVID-19, including opacity and externalities. COVID-19 is a contagious disease whose spread has been difficult to manage due to opacity, as the disease is contagious prior to the presence of symptoms and in some instances testing results for the disease require a considerable time lag before they become available. This highlights the importance of alternative testing strategies to limit the extent of opacity and to manage the costs associated with accurate testing. In addition to individual tests, such strategies would include testing employees in small groups and testing for concentration of the disease in wastewater. Diminishing returns to scale, depreciation, and shocks to the underlying disease also all play an important role in understanding the effectiveness of vaccines. Externalities are central to the mechanism for transmitting contagious diseases. The strength of the externality can be reduced potentially by various preventive measures such as social distancing and masking, though quantitative studies of the efficacy of such measures can be enhanced. Further, efforts to undertake randomized trial studies of various questions related to vaccines and prevention would be helpful, especially in light of the magnitude of economic costs that have been imposed by contagious disease, such as COVID-19. COVID-19 and other contagious diseases also have had considerable effects on the structure of the economy. This has resulted in great development of technologies to support online meetings and work and the ability to work remotely, which in turn highlights dramatic challenges to the five-day work week, the potential for stay-at-home work, the relationship between residential and office real estate and the value of contractual flexibility in the face of dramatic shocks. Some of the effects arise during the period of acute societal disease, while other aspects reflect long-term learning. The nature of societal shocks to work and income generation also has led to important questions regarding the use of societal resources and potential shocks to the overall macroeconomy.