Externalities, Incentives, Government Failure, and the Coronavirus Outbreak

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.