DP15386 Efficient Policy Interventions in an Epidemic

Author(s): Alberto Bisin, Piero Gottardi
Publication Date: October 2020
Keyword(s): Epidemic, Externalities, infection rights, Pigouvian Taxes
JEL(s): D62, D82, H23
Programme Areas: Public Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15386

In the context of an epidemic, a society is forced to face a complex system of externalities in consumption and in production. Command economy interventions can support Efficient allocations at the cost of severe information requirements. Competitive markets for infection rights (alternatively, Pigouvian taxes) can guarantee instead efficiency without requiring direct policy interventions on the activity of agents and firms. We demonstrate that this is the case also when the infections cannot be associated to the activities which originated them; and moral hazard then ensues. Finally, we extend the analysis to situations where governments have only incomplete information regarding the values of the parameters of the infection process or of firms' production processes.