COVID-19 Infection Externalities: Pursuing Herd Immunity or Containment?

Should we let individuals decide how much social distancing to engage in, or are there good reasons why governments should infringe upon civil liberties and order citizens to stay at home? In our latest paper, we show that infectious diseases such as COVID-19 lead to significant externalities, i.e. adverse effects that individuals do not internalize when they engage in their personal cost-benefit analysis. Moreover, if society internalizes these effects by imposing appropriate public health measures, it becomes optimal to pursue a policy of containment rather than letting the disease spread until herd immunity is acquired.

Our work is the first to put numbers on the infection externalities involved: We develop an epidemiological model that captures the main features of COVID-19 in the US economy. We show that individuals perceive the cost an additional infection to be only about a quarter of the true social cost of. An infected individual who does not follow self-isolation guidelines imposes an externality between $46k to $80k per week on the rest of society.

This misvaluation has stark implications for how society ultimately overcomes the disease: in the absence of public health interventions, individuals act cautiously to “flatten the curve” of infections, but the disease is not overcome until herd immunity is acquired, with a sharp recession and a slow recovery that takes several years because individuals must continue to act with caution. By contrast, the optimal public health intervention will contain the disease by targeting the infected, producing a short-lived and much milder recession. Even if the infected and susceptible cannot be targeted independently because of shortages in testing and tracing, it is still desirable to pursue containment through general lockdowns, although the economic cost in that case is much greater.

Click here for the full academic paper

Click here for a non-technical summary on VoxEU