Question

Question 3 (total marks for this question = 4) The effectiveness of vaccinations in preventing the flu is well established. (a) What are the features of flu vaccine that imposes externalities? (1 mark) (b) Explain whether these are: a. positive or negative externalities? (1/2 mark) b. production or consumption externalities (1/2 mark) (c) In a supply and demand diagram, explain why there will be an underconsumption of flu vaccines without government intervention (2 marks)

Answer 1

(2 Externality is the impact of one person's action on the well-being of another person 2 flu vaccines ensure that a person who takes this a vaccine doesn't only ensure that he or she is insulated from the flu but also checks the spread of the flue : to other persons, and thereby benefitting these other people of the society. In this way, consumption of : the vaccines contribute to containment of the disease and disease spread 1. The above feature of flu vaccines imposes. externalities.

a) Externalities can be of two types ¿'. 2) Positive Externality : When one person's action benefit another personi or persons, the externality associated is knoon as positive externalities. i) Negative Externality: When one person's action imposes a cost for is adverse in nature) on other people, then the externality associated with this action is known as negative externality In the above case for flu vaccines, the externality involved is positive externality, as it benefits. the individual ( who takes this vaccine) as well as the society.

b) Use of the vaccines is an example of consumption externalities, because consuniption of these vaccines enhances the overall well-being of the society.

© External Effects (externalities are not accounted for when decisions are taken in a market framework." ..consumers and Producers: are generally driven by their self-interest. That is, why, in case of positive externalities, there will be underconsumption associated i . In the following diagram, we have illustrated ✓ the abone phenomena py Price ; ! i tse Lin om so guowity. . MARKET FOR FLU-VACCINES . In the above diagram, we have considered the market . for the vaccines. Here, ss' is the supply corne (which represents the private cost of producers) of flu vaccines. Sinie, there is no external cost (rie, production externalities) involved, ss' is the only relevant supply wone. On the other hand, DI D Î is the demand come (which represents Just the private individual value) for шукае) for Fщ Vaccиол, Јеге ал, the vacci Deds, which is to the right of the DIDI crne, is the social value wrne (accounting for both private value

and external benefits) for flu vaccines. Therefore, the actual quantity of flu vaccine consumed is sueire, the market outione, but the optimal quantity that should be consumed is Qo, i e, the optiuum quantity .. . Thus, it the market for flu vaccine is left unregulated, without government intervention, there will be resulting underconsung tion of vaccines (since, 8.> 8m).