Question

A market for flu shots is currently _______ the efficient output. However, this market could produce the efficient quantity if the beneficiaries of the external benefits sufficiently compensated those receiving the shot.

9 1 point Does such a compensation mechanism seem likely to develop in this case? Why or why not? BI UA - A - Ix 3 3 x x := E 12pt Paragraph - fx

Answer 1

A market for flu shots creates positive externalities because when a person purchases flu shots, it generates benefits to other individuals who don't even purchase flu shots, as there is a reduced chance if catching flu from others.

In a market with positive Externality, marginal social benefit exceeds marginal private benefit. But market equilibrium occurs at the point where marginal private benefit is equal to the Marginal private cost. Therefore, a market for flu shots is currently operating below the efficient output.

However, this market could produce the efficient quantity if the beneficiaries of the external benefits sufficiently compensated efficiently compensated those receiving the shot. As there is a positive Externality, therefore such compensation mechanism (pigouvian subsidy) is likely to develop in this case. This will cause the Marginal private benefit curve to move towards the marginal social benefit curve and the externality will be internalized.