government is considering a policy of voluntary administration of flu shots for all individuals. will a...

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government is considering a policy of voluntary administration of flu shots for all individuals. will a...

government is considering a policy of voluntary administration of flu shots for all individuals. will a free perfectly competitive market ensure efficient production of flu shots? why? demonstrate graphically.

business economics

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Answer 1

Answer #1

Flu shot has positive externalities. These externalities are positive side effects of consumption that enjoyed by third parties. If market is allowed to operate freely, it would produce at inefficient level. Underproduction will result.

Following is diagram:

In above diagram, Competitive market produces at Q1 while efficient level of output is Q*.

Deadweight loss has been shaded.

Competitive market considers only Marginal Private benefit. it does not account for Marginal external benefit.

Social Marginal benefit( SMB) = PMB +MEB

MSC POSITIVE EXTERNALITY DWL MSB MPB Q1Q* Quantity

output level Q* Consider External benefit as well , Hence, it is efficient level of output.

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Answer 2

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