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CA Foundation · Business Economics · Public Finance

The demand for vaccination has a marginal private benefit (MPB) of Rs 800 per dose at the market quantity, and each dose gives an external benefit of Rs 300 to others by reducing infection spread. The marginal cost of a dose is Rs 900. Which statement is correct about the market outcome and a suitable government response?

Marginal social benefit is Rs 1,100 (800 plus 300), above the Rs 900 marginal cost, so the market underprovides vaccination because buyers ignore the external benefit. A subsidy of up to Rs 300 per dose is justified to raise consumption towards the social optimum.

  1. AMarginal social benefit is Rs 500; the good is overprovided and should be taxed
  2. BMarginal social benefit is Rs 1,100; the good is underprovided and a subsidy of up to Rs 300 per dose is justifiedCorrect
  3. CMarginal social benefit is Rs 1,100; the good is overprovided and should be taxed by Rs 300
  4. DMarginal social benefit is Rs 800; there is no market failure

Explanation

MSB = MPB + external benefit = 800 + 300 = Rs 1,100, which exceeds the marginal cost of Rs 900, so social benefit exceeds cost at this quantity. Private buyers value it at only Rs 800, below cost, so they buy too little and the good is underprovided. A subsidy of up to Rs 300 per dose corrects this. Taxing it would worsen underprovision.

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