A General Equilibrium of COVID-19 and Environmental Economy

This article investigates the economic implications of coronavirus disease 2019 (COVID-19) pandemic in the 2×3 Heckscher-Ohlin model of general equilibrium by integrating the interactive relationships among COVID-19 pandemic, environment and the economy. We consider the environment (a) as a by-product of COVID-19 pandemic, (b) as a public input used for production of goods and services and (c) as a public good directly affecting social utility. A crucial feature of the model is the short-run versus the log-run environmental effects of COVID-19. It is shown that the signs of the environmental response to COVID-19, relative magnitudes of the sectoral environment-output responses and the sectoral factor intensities jointly determine the effects of COVID-19 on factor prices, sectoral outputs and employment and stability of the environmental economy. We show while COVID-19 is bad for society in the short-run; however, in the long-run COVID-19 may be welfare-improving under certain conditions regarding the response of the environment to the human remedial measures. Furthermore, for an environmental economy to be dynamically stable, the net environmental effect of COVID-19 should move in the positive direction; specifically, if the environment is at equilibrium (disequilibrium), the optimum optimorum is free trade policy together with lump-sum income tax used to subsidise the production of counteractive pandemic measures. JEL Codes: F51, F11, I18, Q50