COVID-19 and a Green Recovery?

Preliminary evidence indicates that pollution increases the severity and likelihood of COVID-19 infections similar to many other infectious diseases. This paper models the interaction of pollution and disease preventive actions, either pharmaceutical or non-pharmaceutical interventions, on transmission of infectious diseases in a neoclassical growth framework. There are two externalities – households do not take into account how their actions affect disease transmission, and productive activity results in pollution which increases the likelihood of infections. The disease dynamics are modeled to be of SIS type. We study the difference in health and economic outcomes between the decentralized economy, where households do not internalize externalities, and socially optimal outcomes, and characterize the taxes and subsidies that decentralize the latter. Thus, we examine the question whether there are sufficient incentives to reduce pollution, at both private and public levels, once its effects on disease transmission is considered. In competitive outcomes, pollution increases with increased productivity. The socially efficient outcome has higher pollution than a competitive outcome, despite increase in abatement, as the effect of higher productivity and larger labor supply dominates. The results question the hopes of a Green Recovery.