Question

You are still mayor, and the next item on your agenda is COVID vaccine policy. In particular, you have to decide whether, how, and how much to impact uptake of the vaccine in the city. Suppose the vaccine can be produced at a constant cost (i.e. perfectly elastically) of $50/person. For simplicity, assume there are 100 people in the city, and the demand curve is given by:

So, if the price is set at $89, 1 person will get it; if it’s set at -$10 (i.e. you pay people $10 to get vaccinated), everyone will get it.
a) Discuss a few reasons why some people would be willing to pay more for the vaccine than others. In general, would people with higher incomes have a higher willingness-to-pay for the vaccine or lower?
b) Suppose that the city buys the vaccine and then sells it at cost ($50) to residents.
How many people will get vaccinated? Show the equilibrium graphically.
c) Explain why getting vaccinated could have positive externalities. In other words, if you get vaccinated, how does that help other people?
d) Suppose that the marginal social value curve of the vaccination is given by:
Plot this on the same graph as part b). Does it lie above or below the demand curve? Why?
e) What is the efficient level of vaccinations given the social benefits and costs described above? In other words, how many people will get vaccinated if everyone gets vaccinated whose social benefit is above the cost (and no one else)?
f) Based on what you found in parts b) and e), explain why charging at cost ($50) for a vaccination leads to inefficiently low vaccination rates.

Answer 1

aa) The willingness to pay for the COVID vaccine would vary from person to person. Some people might have pre-existing health conditions that put them at greater risk of contracting the disease, and therefore would be more willing to pay a higher price for the vaccine. Conversely, people who are less concerned about getting infected or have other reservations about the vaccine may not be willing to pay as much.People with higher incomes are generally more willing to pay for a good or service than those with lower incomes. Therefore, in general, people with higher incomes would have a higher willingness-to-pay for the vaccine than those with lower incomes. b) If the city buys the vaccine and sells it at cost ($50) to residents, then all 100 people in the city will get vaccinated. This is because at a price of $50, the quantity demanded by residents (100) is equal to the quantity supplied by the city (also 100), resulting in an equilibrium.c) Getting vaccinated could have positive externalities because it not only protects the vaccinated individual from getting sick, but it also reduces the likelihood of the virus spreading to others. This means that if you get vaccinated, you are not only protecting yourself but also those around you. By reducing the spread of the virus, vaccination can help prevent hospitals from becoming overwhelmed and also reduce the number of deaths caused by the disease.d) The marginal social value curve lies above the demand curve because it takes into account the positive externalities associated with vaccination. The marginal social value curve reflects the total benefit to society from vaccination, including both the private benefit to the individual and the positive externalities that result from reduced transmission of the virus. e) The efficient level of vaccinations is the point at which the marginal social value of the vaccine is equal to the marginal cost of producing it. This occurs when 80 people get vaccinated. At this level, everyone with a willingness-to-pay above $50 (i.e. those who receive a positive net benefit) gets vaccinated, and no one who receives a negative net benefit gets vaccinated. f) Charging at cost ($50) for a vaccination leads to inefficiently low vaccination rates because it does not take into account the positive externalities associated with vaccination. This means that some people who would receive a positive net benefit from vaccination (i.e. their willingness-to-pay is above $50) may choose not to get vaccinated because they do not take into account the positive externalities of reduced transmission. As a result, vaccination rates will be lower than the efficient level of 80, which takes into account the positive externalities of vaccination.