Question

If you get the H1N1 Flu vaccine, not only are your chances of getting sick reduced, but you being healthy also benefits the people you interact with on a daily basis.

A. Assume that the marginal cost of each H1N1 flu shot is constant and is equal to the marginal social cost and that the demand curve is downward sloping

B. Will the marginal social benefit curve be higher, lower, or the same as the demand curve? Why? Draw the marginal social benefit curve into your diagram.

C. In your diagram, show the market equilibrium quantity and the socially optimal quantity of flu shots. Is the market equilibrium quantity of flu shots socially efficient? Why or why not?

D. Many university health centers offer free flu shots to students and employees. Does this solution necessarily achieve efficiency? Using your diagram, explain your answer.

Answer 1

Note: Marginal Social Cost represents Supply Curve. Marginal Benefit Curves represent Demand Curve. In case of an externality (as is the case in given question), Demand curve represents Marginal Private Curve i.e. the marginal benefit that an individual gets from increasing the consumption of a good as opposed to Marginal Social Curve which represents the marginal benfit that society gets from increase in consumption of a good by any member of society.

A,B. As you can see, Marginal Social Curve is higher that the demand curve. This is because the Marginal Social Curve represents the benefits that society derives when any member takes flue shot which is the sum of private health benefit that individual who takes the shot gets and the benefit that other people get by reduction in chances of them getting sick.

C.

As we can see, Market equilibrium quantity is lower than Socially optimal quantity. So, if markets produces the goods based on Market equilibrium, the flu shots will be underproduced. This is because individual choices do not take in account the positive influence of those choices on other people. Here, people will typically not look at the benefit that other people get by their purchase of flu shots for which they are spending money. Hence, their demand will be lower than required by the society.

D.

On of the typical ways of solving this problem of underproduction of flu shots is increasing the demand of flu shots. As we know, there is an inverse relationship between price and quanity. If price reduces, people demand more of that good. Here, university health centers are giving the flu shots for price = 0 to students and employees and hence their demand increases and demand curve shifts from D to D^' and equilibrium quanity gets closer to socially optimal(diagram a below).

But this solution does not necessarily achieve complete efficiency. Complete social efficiency will be achieved only if increase in demand is high enough for it to be equivalent to the Social Marginal Benefit i.e. when demand curve coincides with the social marginal benefit curve. (diagram b above)