Question

For each good listed below, discuss whether the good is likely to entail either an external cost or an external benefit. In addition, discuss whether the private market is likely to provide more or less than the socially optimal quantity of the good

Vaccinations are typically thought to entail _____. As a result, private markets are likely to provide _____ the socially optimal quantity of vaccinations

Answer 1

Vaccinations entail an external benefit, leading private markets to provide less than the socially optimal quantity. A government subsidy can adjust the market exchange to reflect the marginal social benefit, bringing production to the socially optimal quantity.

Step-by-step explanation:

Vaccinations are typically thought to entail an external benefit. As a result, private markets are likely to provide less than the socially optimal quantity of vaccinations. The market demand curve does not reflect the positive externality of flu vaccinations, so only QMarket, the amount of vaccinations that the market will produce and consume without any government intervention, will be exchanged. This outcome is inefficient because the marginal social benefit (MSB) exceeds the marginal social cost (MSC). To correct this inefficiency and encourage the production of vaccinations to the socially optimal level, QSocial, the government can provide a subsidy equal to the positive externality. This policy would lower the effective price consumers pay for vaccinations, thereby increasing demand to the socially optimal level where MSB equals MSC.