Problem
As the authors explain, some markets can fail to achieve the efficient outcome if there are external effects present. For example, if you drive your car in a congested city, your presence on the road reduces the available space for other drivers. Consequently, your presence on the road has a negative impact on the other drivers, and their presence has a negative impact on you. Accordingly, drivers do not recognize the full cost of their driving activities, and they would drive less if they had to pay this full cost. London and other cities reduce congestion by imposing road tolls on drivers who enter the central city districts. These taxes can make the market outcome more efficient by charging drivers for the external costs associated with driving in a congested area.
COVID has created somewhat similar impacts in restaurants, theaters, and other public venues -- your presence increases the health risks to others, and their presence presents a risk to you. Many states and cities have reduced these risks by imposing regulations like minimum distance standards (e.g., maintain at least 6 feet between patrons) or limits on the number of patrons (e.g., 50% of normal restaurant capacity). Suppose we try to reduce the social costs of public interaction by using the toll road approach instead of regulations -- cities could add a $10 per person tax to each dine-in restaurant meal or theater ticket. Do you think this approach would be an effective way to limit human contact during a pandemic? Who would be worse off under this tax policy?