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IAI Actuarial Core Principles · Business Economics · Relationship between the government and the individual firm

In health insurance markets, why might private provision lead to under-consumption of vaccination relative to the social optimum?

Vaccination creates positive externalities: others gain from reduced transmission. Individuals consider only their own private benefit, so marginal private benefit is below marginal social benefit and consumption is below the socially optimal level, justifying subsidies.

  1. AVaccination creates positive externalities, so private benefit is below social benefitCorrect
  2. BVaccination creates negative externalities for non-vaccinated people
  3. CVaccination is a pure public bad
  4. DInsurers set premiums above marginal cost
  5. Individuals overestimate the private benefit of vaccination

Explanation

Vaccination reduces infection risk for others, a positive consumption externality. Individuals weigh only private benefit, so demand is below the socially efficient level, justifying subsidies or mandates. The other options misdescribe the externality.

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