Question

The flu shots that don't happen in a free market but should happen have:

a) A negative impact on social welfare.
b) No impact on social welfare.
c) A positive impact on social welfare.
d) An uncertain impact on social welfare.

Question 7. When a good has external benefits, output at the market equilibrium is too low:
a) For determining the efficient level of output.
b) Because the private value exceeds the social value.
c) Because the social value exceeds the private value.
d) Due to excessive government intervention.

Question 8. If we want more of a good with external benefits produced, we don't because private value is lower than social value. (True/False)

Question 9. A Pigouvian subsidy, a subsidy on a good with external benefits, is equal to the external benefit. (True/False)

Answer 1

A positive externality occurs when a good or service produces benefits that extend to others who are not directly involved in the transaction. The market equilibrium quantity of flu shots is too low due to the positive externality.

Step-by-step explanation:

A positive externality occurs when a good or service produces benefits that extend to others who are not directly involved in the transaction. In the case of flu shots, there is a positive externality because vaccinated individuals not only protect themselves from the flu but also reduce the likelihood of spreading it to others.

This leads to a spillover benefit to society as a whole.Since the market demand curve for flu shots does not reflect the positive externality, the equilibrium quantity of vaccinations in the market is too low. The output at the market equilibrium is lower than the socially desirable level of output because the private value .

To address this inefficiency, the government can provide a subsidy on flu shots equal to the difference between the marginal social benefit and the marginal private benefit. This subsidy increases the quantity of vaccinations to the socially optimal level (QSocial), where the marginal social benefit equals the marginal social cost.