Vaccinations reduce other people\'s exposure to communicable diseases. Suppose t
ID: 1196095 • Letter: V
Question
Vaccinations reduce other people's exposure to communicable diseases. Suppose the market demand for vaccinations is Q = 100-1 OP where Q is millions of vaccinations and P is the price per vaccination. The market is competitive and the supply function is Q = 2P -8. What is the market equilibrium? Calculate and sketch your answer. Do you think the market allocation is efficient? Why or why not? If not, what type of market failure is this? Be as precise as you can. Suppose the marginal external benefit of vaccinations are MEB = 8 -. 15Q. What is the efficient price and quantity? Calculate and sketch your answer. c. What is the DWL of the market allocation? Calculate and Illustrate. d. What is the optimal Piguovian subsidy? What is the incidence of the subsidy?Explanation / Answer
a. Market equilibrium is establsihed where demand = Supply
100-10P = 2P-8
12P = 96
P = $8
Q = 100-10(8) = 20 units
This is not the efficient maket allocation. It is ognoring the positive externality that is there to society if number of people taking vaccinations increase. To solve this problem, government intervention is required.
Increasing supply
Government grants and subsidies to producers of goods and services that generate external benefits will reduce costs of production, and encourage more supply. This is a common remedy to encourage the supply of merit goods such as healthcare, education, and social housing. Such merit goods can be funded out of central and local government taxation. Public goods, such as roads, bridges and airports, also generate considerable positive externalities, and can be built, maintained and fully, or part, funded out of tax revenue.
Increasing demand
Demand for goods, which generate positive externalities, can be encouraged by reducing the price paid by consumers. For example, subsidising the tuition fees of university students will encourage more young people to go to university, which will generate a positive externality for future generations.
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