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CA Foundation · Business Economics · Public Finance

Vaccination against a contagious disease gives marginal private benefit (MPB) of Rs 400 per person and a marginal external benefit of Rs 250 per person. The marginal cost of providing a vaccine is Rs 500. Which statement is correct about the market outcome and the corrective subsidy?

Private benefit of Rs 400 is below the cost of Rs 500, so people will not buy, yet social benefit is Rs 650, above the cost. A subsidy of at least Rs 100, up to the external benefit of Rs 250, would correct the under-consumption.

  1. AIndividuals with MPB of Rs 400 will not buy at a price of Rs 500, though social benefit of Rs 650 exceeds cost; a subsidy of at least Rs 100 per dose would induce purchaseCorrect
  2. BIndividuals will buy because social benefit exceeds cost; no subsidy is needed
  3. CIndividuals will not buy, and a subsidy of Rs 650 per dose is needed to correct the market
  4. DIndividuals will buy, and a tax of Rs 250 per dose should be imposed to curb overconsumption

Explanation

Marginal social benefit = 400 + 250 = Rs 650, which exceeds the cost of Rs 500, so vaccination is socially desirable. But a private buyer compares MPB of Rs 400 with the price of Rs 500 and declines. A subsidy of at least 500 - 400 = Rs 100 makes buying worthwhile, and the maximum justified is the external benefit of Rs 250. A Rs 650 subsidy is wrong because it exceeds the external benefit.

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