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IAI Actuarial Core Principles · Business Economics · Government intervention in a market

Vaccination against a contagious disease gives benefits to people other than the person vaccinated. Which policy response best addresses the resulting market failure?

A subsidy is the best response. Vaccination creates positive external benefits, so private demand understates social benefit and consumption is too low. Subsidising vaccines lowers the price to consumers and moves quantity towards the socially efficient level, whereas taxes or ceilings would not correct the shortfall.

  1. AA tax on vaccines to reduce consumption
  2. BA subsidy to raise vaccination towards the socially efficient levelCorrect
  3. CA price ceiling set below the market price
  4. DA ban on private provision
  5. No action, since the market output is already efficient

Explanation

Vaccination is a positive consumption externality, so marginal social benefit exceeds marginal private benefit and the market under-consumes. A subsidy lowers the price faced by consumers and increases quantity toward the social optimum. A tax would worsen under-consumption.

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