• Students will be able to describe positive and negative externalities.
• Students will be able to explain how public policy can help internalize externalities to achieve positive social outcomes.

• Post or hand out warm‐​up hypotheticals. Ask students to reflect on how they feel about each of the hypothetical situations.
  • You are walking down the hallway to your class, and a large group of students stops to talk right in the middle of the hall.
  • You are at a concert you have been very excited about, but the drive to the concert venue was long, and you are tired. As the headliner takes the stage, the people in front of you immediately stand up. They remain standing for the entire concert.
  • You have homework that you didn’t finish last night, and you are trying to finish it in homeroom. The group of kids beside you is loudly telling stories about their weekend activities.
  • Your teacher told you that you could have free time if the lesson was done early. A group of kids in class wastes time misbehaving. Your class will not have free time.
  • You used to be able to use notes on the test, but on the last unit test, someone cheated. Now no one is allowed to use notes.

• Have students discuss how they feel about each hypothetical and why they feel that way. Guide them toward the answer that they incurred a cost for someone else’s behavior.

• Vocabulary preview activity
  • Split the class into seven relatively equal groups.
  • Hand all students the vocabulary preview sheet.
  • Have each group study one word and come up with a short skit to illustrate the meaning of the word.
  • Every group not performing should draw a one‐​panel cartoon for each word.
    • Externalities: instances where the overall social costs or social benefits of the activity exceed the private costs and benefits but where it is infeasible to set compensation within markets to account for this
    • Negative externality: costs on third parties that cannot be compensated for within markets
    • Positive externality: benefits to third parties that cannot be compensated for within markets
    • Collective action problem: situations where economic actors would be better off cooperating but fail to do so because of individual incentives
    • Fine: a government‐​imposed fee meant to discourage a certain behavior
    • Subsidy: a government payment or benefit meant to encourage a specific behavior
    • Tax: a government‐​imposed cost added to a financial transaction; sometimes used to discourage certain economic behaviors (e.g., Philadelphia’s tax on sugary drinks to discourage their consumption)

• Externality reading and brainstorm example
  • Have students read the excerpt defining the externality problem with COVID-19.
  • Have students answer the questions:
    • According to the author, why is COVID-19 an externality problem?
      • One person’s actions might make a different person very sick.
    • According to the author, what would most likely happen if individuals were allowed to freely choose their own behaviors during a global pandemic?
      • Individuals might account for their own personal risk but not adequately include the risk they are causing others.
    • According to the author, why was it especially difficult for individuals to calculate risks in the early days of the COVID-19 pandemic. Provide evidence from the excerpt
      • Answers may vary.

Some people didn’t know they were infected and therefore behaved as if they weren’t. This caused the virus to spread more rapidly.

• Internalizing the externalities from the warm‐​up
  • Discuss the concept that externalities impose costs on others that often cannot be captured within a transaction price. Have students brainstorm ways to capture the cost of anti‐​social behavior in a transaction.
  • Encourage students to think of ways to punish anti‐​social behavior or to reward social behavior.
  • Revisit the examples from the warm‐​up:
    • Have students try to think of ways to punish those who are causing harm to others.
    • Have students try to think of ways to reward people who are doing the right thing.
    • Have students share ideas and examples.
    • Ask students what was difficult about trying to discourage anti‐​social behavior and encourage pro‐​social behavior.

• Externality Excerpt 2
  • Pass out the Externality Excerpt 2 handout.
  • Have students read the excerpt and respond to the questions:
    • According to the author, why is contracting the virus at a shared family gathering not considered an externality?
      • An externality is a cost or benefit imposed on others for which it is impossible to charge compensation.
      • The people at the Thanksgiving dinner knew and accepted the risks of gathering with people outside of their own households.
    • Identify three major externalities associated with COVID-19.
      • Passing on infections to third parties
      • Potential congestion of large numbers of cases in hospitals
      • Knocking out of essential industries through a major spike in infections
    • According to the author, why is it difficult to internalize these externalities?
      • It is difficult to charge people who put the health of others at risk.

• Policy analysis activity
  • Review the concepts of fines, taxes, and subsidies.
  • Explain to students that these are tools that governments can use to encourage certain behaviors or discourage others.
  • Distribute the policy analysis sheet.
  • Have students work in pairs to analyze the various public policies suggested at the height of the COVID-19 pandemic. For ease of understanding, the first five are punishments of anti‐​social behavior, and the last two are rewarding pro‐​social behavior.
  • Students may decide for themselves whether the policies seem effective. Some suggestions are listed below.
    • Taxes on public transportation may encourage people to socially distance on the way to work but may also be punishing essential workers who have to expose themselves to the virus as a condition of employment.
    • Fines for failing to wear face masks may reduce transmission of the virus but may punish people who are medically sensitive, not be clear enough about which masks reduce transmission, or may not provide flexibility to account for social distancing. Additionally, this may be difficult to enforce.
    • Fines for restaurants that put tables too close together may reduce spread between households, but it might not protect employees or people waiting in the lobby. Restaurants may not have an incentive to open if they can only seat a limited number of people.
    • Taxes for travel to high‐​risk areas might be a disincentive for people traveling to those areas and returning with infections, but these taxes might have an oversized impact on the health of the travel and tourism industry. They do not take into account the personal safety precautions people may or may not take in traveling to these areas.
    • Fines for people who fail to quarantine might cut down on transmission of the virus, but these are very difficult to enforce.
    • Subsidies for companies that can provide work‐​from‐​home options will cut down on transmission, but these subsidies will be concentrated in industries that rely on knowledge workers and will not benefit or reduce transmission among essential service workers who are often paid less generously.
    • Subsidies for sick leave might encourage people to stay home if they have been exposed to the virus, but companies might find it very difficult to continue to operate while offering generous sick leave policies because they may have trouble staffing their businesses during operating hours.
  • Students should take a position on which policy they expect to be most effective.
  • Have pairs report their answers to this last question. Encourage students to collaboratively and constructively challenge each other’s answers.

• Positive externality excerpt and exit ticket
  • Distribute the excerpt and exit ticket.
  • Have students read the excerpt and respond to the prompt.
  • Score students on their ability to take and support a position with economic concepts.

• According to the author, why is COVID-19 an externality problem?
  • One person’s action might make a different person very sick.
  • If one person is behaving badly, only that person will incur the cost.
  • The person who started the pandemic will eventually have to pay the total cost.
• According to the author, what would be most likely to happen if individuals were allowed to freely choose their own behaviors during a global pandemic?
  • Individuals would overestimate their personal risk and stop interacting with others to protect themselves.
  • Individuals might account for their own personal risk but not adequately include the risk they are causing to others.
  • Individuals will underestimate their own personal risk and overestimate their risk to others.
• According to the author, why was it especially difficult for individuals to calculate risks in the early days of the COVID-19 pandemic. Provide evidence from the excerpt. ____________________________________________________________________________________________________

• According to the author, why is contracting the virus at a shared family gathering not considered an externality?
• Underline the three major externalities in the text.
• According to the author, why is it difficult to internalize these externalities? ________________________________________________________________________________________________

Directions: For each of the following policies, identify whether it punishes someone who is behaving dangerously or rewarding someone who is behaving safely. Determine whether you think the policy would be effective and explain why or why not. The first answers from the first boxes are already done for you. All examples can be found on page 28.

• Which of the above policies would be most effective in preventing the spread of the virus? Why?

Directions: Read the excerpt below and answer the questions on the bottom.

• Given both the positive and negative externalities associated with COVID-19 infection, should the government encourage low‐​risk individuals to become infected? Why or why not?

Rubric: