DP8111 Infection, Acquired Immunity and Externalities in Treatment

Author(s): Flavio Toxvaerd
Publication Date: November 2010
Keyword(s): Acquired immunity, Economic epidemiology, Externalities, Treatment
JEL(s): C73, I18
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8111

This paper considers a model of infectious disease, such as swine flu, in which privately costly treatment confers immunity on recovered individuals. It is shown that under decentralized decision making, infected individuals ignore the externality that their treatment has on susceptible individuals and thus seek treatment only if it is privately optimal to do so. In contrast, a benevolent central planner who does take this externality into account in choosing the level of aggregate treatment, may choose to either eradicate the disease or to retard its eventual dissemination into the population even when individuals would not find it privately optimal to do so. The analysis shows that when immunity from future infection is obtained through recovery, treatment resembles vaccination in its effects on infection dynamics, but important differences remain. Vaccination is shown to more effectively curb infection than does treatment. Last, the inefficiency associated with decentralized decision making can be corrected through subsidized treatment offered on a first-come first-served basis.