Maximize Utility subject to R ≤ 1: A Simple Price-Theory Approach to COVID-19 Lockdown and Reopening Policy

44 Pages Posted: 2 Apr 2020 Last revised: 14 Nov 2020

See all articles by Eric B. Budish

Eric B. Budish

University of Chicago - Booth School of Business

Date Written: November 9, 2020

Abstract

This paper presents a simple price-theory approach to COVID-19 lockdown and reopening policy. The key idea is to conceptualize R ≤ 1 as a constraint, allowing traditional economic and societal goals to be the policy objective, all within a simple static optimization framework. This approach yields two main insights. First, the R ≤ 1 constraint imposes a disease- transmission budget on society. Society should optimally spend this budget on the activities with the highest ratio of utility to disease-transmission risk, dropping activities with too low a ratio of utility to risk. Second, masks, tests, and other simple interventions increase activities’ utility-to-risk ratios, and hence expand how much activity society can engage in and utility society can achieve while staying within the R ≤ 1 budget. A simple numerical example, based on estimates from the medical literature for R0 and the efficacy of facemasks and complementary measures, suggests the potential gains are enormous. Overall, the formulation provides economics language for a policy middle ground between society-wide lockdown and ignore-the-virus, and a new infectious threat response paradigm alongside “eradicate” and “minimize.”

Suggested Citation

Budish, Eric B., Maximize Utility subject to R ≤ 1: A Simple Price-Theory Approach to COVID-19 Lockdown and Reopening Policy (November 9, 2020). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-31, Available at SSRN: https://ssrn.com/abstract=3567068 or http://dx.doi.org/10.2139/ssrn.3567068

Eric B. Budish (Contact Author)

University of Chicago - Booth School of Business ( email )

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