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CA Foundation · Business Economics · Public Finance

A government gives a subsidy for vaccination because each vaccinated person also lowers the infection risk for others. The market, left alone, would provide too few vaccinations. This case illustrates which concept?

This illustrates a positive externality leading to underproduction. Vaccination benefits others besides the person vaccinated, so the social benefit exceeds the private benefit and the market supplies too little. A subsidy encourages more vaccination, moving output towards the socially desirable level.

  1. ANegative externality leading to overproduction
  2. BPositive externality leading to underproductionCorrect
  3. CPublic good leading to overconsumption
  4. DMonopoly leading to excess supply

Explanation

Vaccination gives benefits to third parties, so social benefit exceeds private benefit. This is a positive externality, and the market provides less than the socially optimal quantity. A subsidy raises the private benefit towards the social level. Overproduction occurs with negative externalities, which is the opposite case.

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