Final answer:
To move market equilibrium towards social equilibrium in the presence of externalities, the government can use subsidies for positive externalities, like vaccinations, or taxes and regulations for negative externalities, such as pollution, to internalize the external costs and benefits.
Step-by-step explanation:
When dealing with externalities, a common market failure, government interventions such as subsidies may help align market equilibrium with social equilibrium. Subsidies can encourage consumers to engage in positive externalities, such as getting vaccinated, by reducing their out-of-pocket expense, which adjusts the market price and quantity towards the socially optimal level. For negative externalities, like pollution, the government can impose taxes or regulations that internalize the external costs, shifting the supply curve to reflect the true social cost of production.
For example, in the case of flu vaccinations which have a positive externality, a government can issue a voucher that covers the spillover benefit. This raises the equilibrium quantity to the socially optimal level, Qsocial, with MSB (Marginal Social Benefit) equal to MSC (Marginal Social Cost). Consumers pay a price of Psubsidy while suppliers receive Psocial, ensuring the socially optimal quantity of vaccinations is achieved.
Alternatively, in scenarios with a negative externality, such as pollution, if firms are forced to internalize the additional external costs, this will shift the supply curve up, increasing cost of production. This results in a new equilibrium with a higher price and lower quantity, closer to the socially optimal outcome where social costs are fully accounted for.