Discussion paper

DP14596 COVID-19 Infection Externalities: Trading Off Lives vs. Livelihoods

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. 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: individually rational susceptible agents act cautiously to “flatten the curve” of infections, but the disease is not overcome until herd immunity is acquired, with a slow recovery over several years. By contrast, the socially optimal approach in our model contains and eradicates the disease, producing a much milder recession. Eradication is optimal even if the infected and susceptible cannot be targeted independently, although the economic cost is much higher.

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Citation

Korinek, A and Z Bethune (eds) (2020), “DP14596 COVID-19 Infection Externalities: Trading Off Lives vs. Livelihoods”, CEPR Press Discussion Paper No. 14596. https://new.cepr.org/publications/dp14596