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ACCA Applied Knowledge · Business and Technology · Microeconomic factors

Vaccination against an infectious disease benefits the person vaccinated and also reduces the risk of infection for others. Without intervention, the free market output of vaccinations is Q1, while the socially optimal output is Q2. Which statement correctly describes the situation and a suitable government response?

Vaccination creates a positive externality because others benefit without paying, so private demand understates social benefit and the free market output is below the social optimum. A subsidy, or state provision, is suitable to raise vaccination towards the socially optimal level.

  1. AQ1 is greater than Q2 because of a negative externality; a tax on vaccination is appropriate
  2. BQ1 is less than Q2 because of a positive externality; a subsidy to vaccination is appropriateCorrect
  3. CQ1 equals Q2 because individuals consider all benefits; no action is needed
  4. DQ1 is less than Q2 because of a negative externality; a ban is appropriate

Explanation

Vaccination creates external benefits to third parties, so social benefit exceeds private benefit. Individuals consider only private benefit, so the market under-provides it (Q1 < Q2). A subsidy or provision by the state raises output towards the social optimum. A tax would reduce output further.

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