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At the onset of the Covid-19 pandemic, the US government drastically increased UI benefits from the low 45% replacement rates and 6-week duration shown in the lecture. Benefits levels were increased by $600 per week for all recipients, and the maximum benefit duration was increased by 13 weeks. Republican critics of the policy noted that the higher benefit levels exceeded the monthly earnings when employed of most UI recipients, i.e. the replacement rate exceeded 100%. This fact, in their words, amounted to "paying people to remain unemployed." The expanded benefits were subsequently allowed to expire, and this was the stated rationale for doing so. This question unpacks the moral hazard argument the Republicans had in mind.

A) How and why does expanding unemployment insurance incur a moral hazard cost?

B) Against what should we compare the moral hazard cost? What are the benefits on the other side of the tradeoff.

C) In a pandemic, working also entails externalities from disease transmission. How might this additional complication modify the optimal generosity of UI during a pandemic?