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

Author(s): Zachary Bethune and Anton Korinek

Publication Date: April 2020

Keyword(s): cost of disease, COVID-19, infection externalities and social distancing

Programme Area(s): International Macroeconomics and Finance, Macroeconomics and Growth and Public Economics

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.

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Bibliographic Reference

Bethune, Z and Korinek, A. 2020. 'COVID-19 Infection Externalities: Trading Off Lives vs. Livelihoods'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14596