Question

one way to obtain the economically efficient amount of chicken pox vaccinations is for governments to subsidise these vaccinations. what is the size of the per-vaccination pigovian subsidy that the government must provide to internalise the external benefits?

Answer 1

Governments can subsidize vaccinations to align private benefits with social benefits, increasing vaccination levels to the socially optimal quantity, where the marginal social benefit equals the marginal social cost.

Step-by-step explanation:

The question concerns how governments can correct market failures related to external benefits of vaccinations, specifically chicken pox or flu shots. Governments can subsidize vaccinations to internalize the external benefits, such as herd immunity and reduced healthcare costs, which are not reflected in the market price. The size of the subsidy should be equal to the per-unit spillover benefits. This subsidy effectively lowers the out-of-pocket cost for individuals getting vaccinated (Psubsidy), aligning the private benefit with the social benefit (MSB). Consequently, the quantity of vaccinations would increase towards the socially optimal level where the market quantity (Qsocial) and the price (Psocial) lead to MSB equaling MSC.