• Robert MacCulloch

Has COVID-19 put proponents of free markets on the back foot?

The virus crisis has led to huge government intervention around the world, particularly in terms of lock-downs and social distancing rules. Is this crisis a negation of free market economics, as many Kiwi commentators are arguing?

A key feature of COVID-19 is that it involves a potentially lethal 'externality' whereby one person can infect another without consequence to the former. A well-known externality much studied in economics is pollution whereby firms may hurt the environment without bearing the cost themselves. In order to align private and social costs, even staunch defenders of free markets largely support carbon taxes, or emissions trading schemes. However, these same folks mostly don't support governments trying to stop pollution using "command & control regulations", like the ban on oil and gas exploration in NZ, which can cause inefficiencies.

When it comes to the virus, however, it's not possible to tax a person who sneezes on another. So government rules, or socially responsible behavior, may be the only way out.

Consequently, the proliferation of virus-related lock-down and distancing rules should not be misinterpreted as suggesting that burdensome regulation by big government is, more generally, a good thing. Rather such rules are the only practical way of trying to improve a bad situation, namely limiting the harm caused by a contagious bug that has put the problem of solving a health-related externality onto the forefront of world headlines.

For an opposing opinion from the NZ Herald, see: