Discussion Papers on Economics,
University of Southern Denmark, Department of Economics

Abstract: This paper derives and simulates a compartmental model of the Coronavirus outbreak in which individuals have self-interested reactions to the threat of infection, proportional to the heterogeneous risk of complications that they face. As long as high-risk individuals perceive infection as sufficiently undesirable, the externalities created by the free circulation of low-risk individuals are positive and potentially reduce the total number of infections by approximately 100 million in the U.S. (including every high-risk individual). In this case, the social interaction of low-risk individuals should be subsidized, according to the same market failure arguments used to justify broad confinement mandates, which constitute government failures.

Keywords: Externalities; government failure; Coronavirus; Covid-19; pandemic

JEL-codes: C02; D62; H40; I10

20 pages, November 2, 2020

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