Question

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. also how can you demonstrate on your graph how can an efficient outcome be achieved? (Hint: will it require change in equilibrium)? will you recommend any government intervention/regulation if yes in what form?if no,why?

Answer 1

In the above figure , the market demand curve D1 for flu shorts represents the marginal private benefits that the individual receive from the shorts .

The Supply Curve S1 is represented by the Marginal Private Cost which is the cost of producing the vaccines .

The equilibrium quantity of flu shorts produced in the market is when MPB = MPC at Pm price and Qm quantity.

In the given figure we see that MSB ( Marginal Social Benefit ) curve is higher than the MPB curve because of additional of spillover benefits to those who have not purchased the vaccines but their chance of coming in contact with the flu has reduced .

Why is government intervention required :-

Government intervention is required because market places does not understand the positive externality of flu vaccines and thus flu shorts will go under produced and under consumed.

Impact of government intervention :-

In the above figure , the social optimal quantity is not achieved

The government can correct the above scenario through subsidies of vouchers to citizens who wishes to get vaccinated.

Thus when flu shorts are purchased suppliers of flu short receive payment of Pso while consumers pay only a price of Psu .

This helps in the production of optimal quantity of vaccinations .