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

37 Pages Posted: 8 May 2020

See all articles by Zachary Bethune

Zachary Bethune

University of Virginia

Anton Korinek

University of Virginia; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2020

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. 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.

Keywords: cost of disease, COVID-19, infection externalities, social distancing

JEL Classification: E1, E65, H12, H23, I18

Suggested Citation

Bethune, Zachary and Korinek, Anton, COVID-19 Infection Externalities: Trading Off Lives vs. Livelihoods (April 2020). CEPR Discussion Paper No. DP14596, Available at SSRN: https://ssrn.com/abstract=3594218

Zachary Bethune (Contact Author)

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

Anton Korinek

University of Virginia

1400 University Ave
Charlottesville, VA 22903
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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