Covid-19 Infection Externalities: Trading Off Lives vs. Livelihoods

Zachary A. Bethune and Anton Korinek

No 27009, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analyze the externalities that arise when social and economic interactions transmit infectious diseases such as COVID-19. Individually rational agents do not internalize that they impose infection externalities upon others when the disease is transmitted. In an SIR model calibrated to capture the main features of COVID-19 in the US economy, we show that private agents perceive the cost an additional infection to be around $80k whereas the social cost including infection externalities is more than three times higher, around $286k. This misvaluation has stark implications for how society ultimately overcomes the disease: for a population of individually rational agents, the precautionary behavior by the susceptible flattens the curve of infections, but the disease is not overcome until herd immunity is acquired. The resulting economic cost is high; an initial sharp decline in aggregate output followed by a slow recovery over several years. By contrast, the socially optimal approach in our model focuses public policy measures on the infected in order to contain the disease and quickly eradicate it, which produces a much milder recession. If targeting the infected is impossible, the optimal policy in our model is still to aggressively contain and eliminate the disease, and the social cost of an extra infection rises to $586k.

JEL-codes: E1 E65 H12 H23 I18 (search for similar items in EconPapers)
Date: 2020-04
New Economics Papers: this item is included in nep-dem, nep-env, nep-hea and nep-mac
Note: DAE EFG EH IFM PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (117)

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Working Paper: COVID-19 Infection Externalities: Trading Off Lives vs. Livelihoods (2020)
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