Question

What would happen if the government subsidized consumption of this product because it has positive externalities in consumption

Answer 1

The government can subsidize products with positive externalities, like vaccinations, to achieve a socially desired level of consumption. This subsidy usually aims to equate the market equilibrium quantity and price with the social optimum where marginal social benefit equals marginal social cost, leading to a higher quantity of the product consumed.

Step-by-step explanation:

When a product has positive externalities in consumption, such as vaccinations or education, the government can subsidize consumption to achieve a socially optimal level of output. A subsidy, like a voucher, can be used to encourage the consumption of products that generate spillover benefits. For instance, providing a voucher effectively increases consumers' income, allowing them to purchase a flu shot at a reduced price. The voucher would ideally be set at a level equal to the per-unit spillover benefits. This makes the market equilibrium shift to a quantity of Qsocial and a price of Psocial, where the marginal social benefit (MSB) equals the marginal social cost (MSC). As a result, the number of vaccinations administered would increase to the level that is deemed socially beneficial.

Answer 2

If a product has postive externalities, it means that it benefits society in some way that is not reflected in the product's price, supply and demand.

Step-by-step explanation:

This causes economic distortion in which the possible benefit of the product are less than ideal.

For this reason, governments can subsidize goods and services that have postiive externalities, with the effect of bringing about the full benefit of the good or service to society.

A typical example is education, which is not a product, but a service. Education has a lot of positive externalities: it makes societies more educated and productive, even more peaceful. This is why the government heavily subsidizes education, both in primary, secondary, and tertiary levels.