We extend the canonical epidemiology model to study the interaction between economic decisions and epidemics. Our model implies that people’s decision to cut back on consumption and work reduces the severity of the epidemic, as measured by total deaths. These decisions exacerbate the size of the recession caused by the epidemic. The competitive equilibrium is not socially optimal because infected people do not fully internalize the e§ect of their economic decisions on the spread of the virus. In our benchmark scenario, the optimal containment policy increases the severity of the recession but saves roughly 0.6 million lives in the U.S.
I would add this: if you hold the timing and uncertainty of deaths constant, death and output tend to move together. That is, curing people and developing remedies and a vaccine will do wonders for gdp, through the usual channels. The tricky trade-off is between output and the timing of deaths. Whatever number of people are going to die, it is better to “get that over with” and clear up the uncertainty. Policy is thus in the tricky position of wishing to both minimize the number of deaths and yet also to speed them along. Good luck with that! In terms of an optimum, might it be possible that some of the victims do not…get infected and die quickly enough? Might that be the more significant market failure?
Via Harold Uhlig. In any case, kudos to the authors for focusing their energies on this critical problem.