Assume that price underestimates the value that society places on the flu vaccine. If firms produce where P = MC, firms will be producing
A) the socially efficient amount of flu vaccine.
B) more than the socially efficient amount of flu vaccine
C) less than the socially efficient amount of flu vaccine.
D) so that consumer surplus is zero.

Question

Quizplus · Accepted Answer

When the price underestimates the value society places on the flu vaccine, producing where price equals marginal cost (P = MC) results in less production than the socially efficient amount. This is because the social value of additional vaccinations (external benefits to others from reduced transmission) is not fully captured in the market price.

Assume That Price Underestimates the Value That Society Places on the Flu