Question

There are vaccinations against two communicable diseases-1 and 2- are provided by a competitive market. assume that the marginal cost of producing each vaccination is constant. assume that demand for vaccine 1 is price elastic, demand for vaccine 2 is relatively price-inelastic.

1. Sketch the supply and demand curves for each vaccination on separate graphs and show the equilibrium price and quantity.
2. 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.
3. Did you observe any differences in the deadweight loss for both vaccines? Why or why not?

Answer 1

(a) The market for vaccine 1 and 2 are respectively presented in F-1 and F-2 above respectively. The demand for vaccine 1 is relatively more elastic than vaccine 2, i.e., demand curve for vaccine 2 is flatter than that of vaccine 2. The intersection of the demand curve and supply curve determines the equilibrium price (p*) and equilibrium quantity (q*) for both the vaccines.

(b) Considering positive externalities, consumers get more marginal benefits correpsponding to each price levels, which can be shown by shifting the demand curves up from D to D'. This shows that the social optimal levels of vaccines (q*s) are higher than the market equilibrium level (q*). Vaccine 1 market involves too few vaccines for each disease relative to vaccine 1, i.e., q*q*s for vaccines 1 > q*q*s for vaccines 2. Because it is less elastic than vaccine 1. Because of the positive externalities, both the markets have deadweight loss, which is shown as the area of the triangle EFG in each market.

(c) We may observe that the deadweight loss is more in case of vaccine 2, where demand is relatively inelastic.