Question

Suppose vaccinations against two communicable diseases-X and Y- are provided by a competitive market. For the sake of simplicity, assume that the marginal cost of producing each vaccination is constant. Further, assume that demand for vaccine X is price elastic, whereas demand for vaccine Y is relatively price-inelastic.

a) [2 points] Sketch the supply and demand curves for each vaccination on separate graphs and show the equilibrium price and quantity.

b) [5 points] Now suppose that vaccinations generate positive externalities. On the same graph, illustrate a case in which the outcome you derived in part (a) involves too few vaccinations for each disease relative to the socially optimal quantity. Label the socially optimal quantity and the deadweight loss in each case on your graph. Explain your answer.

c) [5 points] Did you observe any differences in the deadweight loss for both vaccines? Why or why not?

d) [3 points] What public policies might lead to an optimal amount of vaccinations?

Answer 1

a. Since it is a competitive market supply curve will be given by P = MC and is a horizontal line parallel to x-axis. The required equilibrium price and quantities are shown on figures below.

b. The graph below shows positive externality and deadweight loss for each demand curve.

c. Deadweight loss in case of elastic demand is greater as compared to deadweight loss in inelastic demand. This is because, suppose the government announces small amount of subsidy to consumer for each vaccine type. This will increase real purchasing power. In case of vaccine X with elastic demand, it will raise quantity of X by larger amount. In case of vaccine Y with inelastic demand, same amount of subsidy raises demand by proportionately smaller amount. Therefore deadweight loss( or surplus accruing to no market participants due to sub optimal market outcome) is larger for elastic goods vis a vis inelastic goods.

d. In order to ensure that market quantity reaches socially optimal quantity of vaccines, State can give cash subsidy or kind to consumers. This would shift demand curve to right until it reaches MSB curve.