Question

(i) Suppose vaccinations against a communicable disease are provided by a competitive market. Sketch the supply and demand curves on a graph and show the equilibrium price and quantity.

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

(iii) What public policies might lead to an optimal amount of vaccination?

Answer 1

Ans) Externality is when the bystander bears the cost or benefit of any activity. It is of two types ÷ positive and negative.

Positive externality is when the bystander bears the benefit of any activity. Eg- education, planting trees, vaccination etc.

Negative externality is when the bystander bears the cost of any activity. Eg- pollution.

1)

2) Taking vaccine generates positive externality. It is because taking vaccine not only prevents that person from disease but society as whole, as it prevents spread of disease. This implies, marginal social benefit of vaccine is more than marginal private benefit. The difference between social benefit and private benefit is known as external benefit. When this external benefit is ignored, market produces less quantity than socially optimal.

3) In order to internalise this externality, government gives subsidy equal to external benefit. This subsidy will increase the quantity and will bring it equal to socially optimal quantity.