Module 7a: Control of Communicable Disease
Key Theme: Diseases are not just biological events; they are economic problems involving
externalities and incentives.
1. The Rationale for Policy Intervention
• The Externality Problem: An infected person imposes a negative externality (infection
risk) on others. Because individuals do not bear the full cost of infecting others, they
exert too little effort to self-isolate.
• Collective Action Problem: Disease control is a public good defined by two features:
o Non-rival: My safety (herd immunity) doesn't reduce yours.
o Non-excludable: You cannot stop non-payers (e.g., anti-vaxxers) from benefiting
from herd immunity.
• Free Riding: Because of these features, individuals "free ride" on the immunity of
others, leading to a market failure where too few people voluntarily protect themselves
or vaccinate.
o EXERCISE LINK: Exercise 1, Q2a asks if a free market reaches the social optimum
(Answer: No, due to positive externalities).
2. Costs of Disease & Policy
When designing policy, we must balance two types of costs:
• Epidemiological Cost: The direct health costs (sickness, death, treatment).
• Excess Burden: The indirect economic, psychological, and social costs arising from trying
to prevent the disease (e.g., lost GDP during lockdown, mental health struggles).
o EXERCISE LINK: Exercise 1, Q1c asks you to debate "Zero-COVID" policies using
these concepts. The argument against strict lockdowns is often based on the
high excess burden.
3. The Prevalence Response (Crucial Concept)
This is the central concept of "Economic Epidemiology."
• Definition: People are rational. When disease prevalence (risk) is high, people
voluntarily increase self-protection (SP) because it is in their self-interest to avoid
infection.
• The "Crowd-Out" Effect: Government mandates (lockdowns) or subsidies are less
effective when prevalence is high. Why? Because people would have stayed home
anyway due to fear. The policy "crowds out" voluntary behavior.
• Policy Timing:
o Early Intervention: Most effective. When prevalence is low, voluntary protection
is low. A mandate forces safety when people wouldn't do it voluntarily.
o Late Intervention: Less effective. If prevalence is high, people are already hiding.
The policy adds little extra safety.
o EXERCISE LINK: Exercise 1, Q1a asks if early or late lockdown is more effective.
(Answer: Early, due to low prevalence response).
o EXERCISE LINK: Exercise 1, Q2c, 2d, 2e requires you to derive demand functions
mathematically. You must show that demand for vaccines depends on Price (p)
and Prevalence (I). The Prevalence Response elasticity reduces the effectiveness
, of price subsidies because as price drops à more vax à less disease à less fear
à less demand.
4. Vaccine Subsidies & Infectiousness (R_0)
• Marginal External Benefit (MEB): The value of the "safety" you provide to others by
getting vaccinated.
• The Relationship: The MEB does not rise in a straight line with infectiousness (R_0). It
follows an inverted U-shape:
o Low R_0: Disease spreads slowly; vaccinating one person saves few others (Low
MEB).
o High R_0: Disease spreads so fast that everyone gets infected anyway, or
prevalence response is so high everyone hides. Vaccinating one person makes
little difference to the aggregate spread (Low MEB).
o Medium R_0: Vaccinating one person prevents a large chain of infections
(Highest MEB).
o EXERCISE LINK: Exercise 1, Q2g & 2h asks why MEB is not highest for the most
infectious disease. (Answer: The inverted U-shape and prevalence response).
Module 7b: Sin Taxes
Key Theme: Using taxes to correct behavior that hurts society (Externalities) or the individual
(Internalities).
1. Internalizing Externalities (The Standard Model)
• Negative Externality: Consumption of goods (sugar, tobacco, gas) harms others (e.g.,
passive smoking) or society (e.g., collective insurance costs for treating obesity/cancer) .
• Pigouvian Tax: The optimal tax should equal the Marginal External Cost (MEC) at the
optimal level of consumption. This aligns the private cost with the social cost.
o EXERCISE LINK: Exercise 2, Q1 asks about external benefits/costs of weight-loss
drugs (GLP-1). Benefits: Lower shared insurance costs. Costs: Living longer costs
the pension system more.
o EXERCISE LINK: Exercise 2, Q2 asks you to identify Deadweight Loss (DWL). This
is the welfare society loses because consumption is not at the optimal level
(where Marginal Social Benefit = Price).
2. Correcting Internalities (The Behavioral Model)
• Internality: Harm imposed on oneself due to "System 1" thinking (impulsiveness, lack of
self-control, ignorance). The "biased self" consumes too much soda/tobacco compared
to what the "rational self" would want.
• Second-Best Policy: We can't design a perfect tax for every individual's specific bias. A
broad "Sin Tax" is a "second-best" solution to lower consumption toward the rational
optimum.
3. Distributional Incidence (Equity vs. Efficiency)
• Regressivity: Sin taxes often hit the poor harder because they spend a higher
percentage of income on these goods or consume them more.
• Distributional Weights:
Key Theme: Diseases are not just biological events; they are economic problems involving
externalities and incentives.
1. The Rationale for Policy Intervention
• The Externality Problem: An infected person imposes a negative externality (infection
risk) on others. Because individuals do not bear the full cost of infecting others, they
exert too little effort to self-isolate.
• Collective Action Problem: Disease control is a public good defined by two features:
o Non-rival: My safety (herd immunity) doesn't reduce yours.
o Non-excludable: You cannot stop non-payers (e.g., anti-vaxxers) from benefiting
from herd immunity.
• Free Riding: Because of these features, individuals "free ride" on the immunity of
others, leading to a market failure where too few people voluntarily protect themselves
or vaccinate.
o EXERCISE LINK: Exercise 1, Q2a asks if a free market reaches the social optimum
(Answer: No, due to positive externalities).
2. Costs of Disease & Policy
When designing policy, we must balance two types of costs:
• Epidemiological Cost: The direct health costs (sickness, death, treatment).
• Excess Burden: The indirect economic, psychological, and social costs arising from trying
to prevent the disease (e.g., lost GDP during lockdown, mental health struggles).
o EXERCISE LINK: Exercise 1, Q1c asks you to debate "Zero-COVID" policies using
these concepts. The argument against strict lockdowns is often based on the
high excess burden.
3. The Prevalence Response (Crucial Concept)
This is the central concept of "Economic Epidemiology."
• Definition: People are rational. When disease prevalence (risk) is high, people
voluntarily increase self-protection (SP) because it is in their self-interest to avoid
infection.
• The "Crowd-Out" Effect: Government mandates (lockdowns) or subsidies are less
effective when prevalence is high. Why? Because people would have stayed home
anyway due to fear. The policy "crowds out" voluntary behavior.
• Policy Timing:
o Early Intervention: Most effective. When prevalence is low, voluntary protection
is low. A mandate forces safety when people wouldn't do it voluntarily.
o Late Intervention: Less effective. If prevalence is high, people are already hiding.
The policy adds little extra safety.
o EXERCISE LINK: Exercise 1, Q1a asks if early or late lockdown is more effective.
(Answer: Early, due to low prevalence response).
o EXERCISE LINK: Exercise 1, Q2c, 2d, 2e requires you to derive demand functions
mathematically. You must show that demand for vaccines depends on Price (p)
and Prevalence (I). The Prevalence Response elasticity reduces the effectiveness
, of price subsidies because as price drops à more vax à less disease à less fear
à less demand.
4. Vaccine Subsidies & Infectiousness (R_0)
• Marginal External Benefit (MEB): The value of the "safety" you provide to others by
getting vaccinated.
• The Relationship: The MEB does not rise in a straight line with infectiousness (R_0). It
follows an inverted U-shape:
o Low R_0: Disease spreads slowly; vaccinating one person saves few others (Low
MEB).
o High R_0: Disease spreads so fast that everyone gets infected anyway, or
prevalence response is so high everyone hides. Vaccinating one person makes
little difference to the aggregate spread (Low MEB).
o Medium R_0: Vaccinating one person prevents a large chain of infections
(Highest MEB).
o EXERCISE LINK: Exercise 1, Q2g & 2h asks why MEB is not highest for the most
infectious disease. (Answer: The inverted U-shape and prevalence response).
Module 7b: Sin Taxes
Key Theme: Using taxes to correct behavior that hurts society (Externalities) or the individual
(Internalities).
1. Internalizing Externalities (The Standard Model)
• Negative Externality: Consumption of goods (sugar, tobacco, gas) harms others (e.g.,
passive smoking) or society (e.g., collective insurance costs for treating obesity/cancer) .
• Pigouvian Tax: The optimal tax should equal the Marginal External Cost (MEC) at the
optimal level of consumption. This aligns the private cost with the social cost.
o EXERCISE LINK: Exercise 2, Q1 asks about external benefits/costs of weight-loss
drugs (GLP-1). Benefits: Lower shared insurance costs. Costs: Living longer costs
the pension system more.
o EXERCISE LINK: Exercise 2, Q2 asks you to identify Deadweight Loss (DWL). This
is the welfare society loses because consumption is not at the optimal level
(where Marginal Social Benefit = Price).
2. Correcting Internalities (The Behavioral Model)
• Internality: Harm imposed on oneself due to "System 1" thinking (impulsiveness, lack of
self-control, ignorance). The "biased self" consumes too much soda/tobacco compared
to what the "rational self" would want.
• Second-Best Policy: We can't design a perfect tax for every individual's specific bias. A
broad "Sin Tax" is a "second-best" solution to lower consumption toward the rational
optimum.
3. Distributional Incidence (Equity vs. Efficiency)
• Regressivity: Sin taxes often hit the poor harder because they spend a higher
percentage of income on these goods or consume them more.
• Distributional Weights:
