Question

Assume that the government is planning to address the problem of high prices for flu vaccine in an effort to lower flu incidence. You are hired as an economic consultant to decide upon what kind of a policy to implement in order to improve both the accessibility and affordability of flu vaccine for consumers. Which of the following policies would most likely achieve the goal?

a. A price ceiling.

b. A price floor.

c. A subsidy to the producers.

Using three separate sets of supply-and-demand graphs show the effect of each of the policies on market outcomes. Assume competitive markets with an upward-sloping supply curve and a downward-sloping demand curve.

Answer 1

a) In case of price ceiling, price is reduced (legal price is set below the market price) but since there is an

excess demand at this price, not all those who can afford buy a flu vaccine. Hence, this policy is not effective

b) In case of a price floor, the price is set above the market price. This policy is not applicable because the aim

of the government is to set a price lower than the market price to increase affordability and accessibility. But

here the price is increased instead.  

c) A subsidy is most appropriate. This will increase the price received by producers, reduce the price for buyers

of flu vaccine and thus, increase the quantity purchased.