An Institutional Economic Analysis of wearing a Mask: Internalizing the Externality

–Varada Shyama Bhat N and Mahek Khandelwal

This essay attempts to analyse economically the impact of not wearing a mask and not conforming to the social distancing guidelines in public spaces. A broad understanding of the issue reflects that there are certain costs associated with individuals not wearing a mask and there are also costs that the society has to bear otherwise; an externality arises when the former exceeds the latter. This externality is attributed to information asymmetry insofar as individuals are not aware of the transaction costs (transaction is going out without a mask) and moral hazard where individuals though they are aware of the impact still make an active choice not to wear a mask and flout the social distancing guidelines. This externality results in market failure. The essay evolves to internalise both the costs and benefits; the solutions provided include efficient local self-governments to internalize the costs, and effective implementation of rules and guidelines to increase awareness engendering reduction of information asymmetry.

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