Discussing positive consumption externality

Reference no: EM1315238

Think about the market for vaccines, which we described in class as having a positive consumption externality.

(a) Explain carefully why this is so, especially who else benefits and how.

(b) Define carefully the general meaning of marginal external benefit. Explain how you think the marginal external benefit (MEB) of a vaccine will vary with the quantity of vaccine consumed and why. Draw the curve for the MEB that you have described.

(c) Given the MEB you have described and assuming an upward sloping MPC curve and a downward sloping MPB curve, illustrate the first free market and socially optimal quantities in a supply and demand diagram. Explain in words why these quantities occur and how they compare.

(d) Describe in words and illustrate in the graph a tax or subsidy policy that would result in the socially optimal quantity being produced. Explain in accessible words why the policy would result in the socially optimal quantity of vaccine being consumed.

(e) Define in general the term "internalize the externality" and explain its application in this case. Discuss a policy other than a tax or subidy that could cause individuals to internalize the externality. Explain briefly.

Reference no: EM1315238

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