ChainWhat it assumes · how to break it
Start
Parents decide whether to have their child vaccinated against measles; a vaccinated child also protects others by reducing the spread of the disease.
1
As a result, each person vaccinated lowers the chance that others catch the disease, so the marginal social benefit of vaccination is above its marginal private benefit.
external benefit · MPB · MSB
external benefit · MPB · MSB
Assumes: Vaccination reduces transmission to others.
But: Some vaccines protect only the person vaccinated; tetanus does not pass between people, so its vaccine gives little external benefit.
2
Since people decide whether to be vaccinated by weighing their own benefit against the price, they ignore the protection they give to others.
self-interest · consumer decision-making
self-interest · consumer decision-making
Assumes: Individuals take no account of the benefit to others.
But: Many people are vaccinated partly to protect vulnerable relatives, so some of the external benefit already shapes their decision.
3
Therefore, consumption settles at Q1 where MPB = MPC, below the social optimum Q* where MSB = MSC.
underconsumption
underconsumption
Assumes: Vaccines are left to the market.
But: Free provision by the state removes the price barrier and moves consumption towards Q*.
4
This means on each unit between Q1 and Q* the marginal social benefit is greater than the marginal social cost, so society misses out on welfare gains it could have had, a deadweight welfare loss.
deadweight welfare loss · allocative inefficiency (MSB > MSC)
deadweight welfare loss · allocative inefficiency (MSB > MSC)
Best link to attack
Assumes: The external benefit of each extra vaccination stays large.
Assumes: The external benefit of each extra vaccination stays large.
But: Once most people are vaccinated, herd immunity means each extra vaccination adds little protection for others, so MSB falls close to MPB and the welfare loss near Q* is small.
End
Underconsumption causes a deadweight welfare loss: MSB exceeds MSC on the units between Q1 and Q* that are not consumed.
Evaluation chain
- E1However, the size of the welfare loss depends on the external benefit of each extra vaccination.
- E2When coverage is already high, herd immunity protects most unvaccinated people, so one more vaccination adds little protection for others.
- E3As a result, the gap between MSB and MPB narrows as coverage rises, and the welfare loss triangle is small.
- E4So the welfare loss is large when uptake is low, but small when uptake is already close to the level needed for herd immunity.
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Questions this answers
- Using a diagram, explain the welfare loss from a positive consumption externality.
- Explain why the market for a merit good is allocatively inefficient.
- Evaluate the case for free provision of vaccines on welfare grounds.
Diagram
MSB above MPB, with MPC = MSC (supply): market output Q1 where MPB = MPC, social optimum Q* where MSB = MSC, so Q1 < Q*. Shade the welfare loss triangle between MSB and MSC from Q1 to Q*, with its point at Q*.
Reverse and related
Negative consumption externality → overconsumption and a welfare loss on the units between Q* and Q1.