Suppose that flu shots create a positive externality equal to $12 per shot.Further suppose that the government offers a $5 per-shot subsidy to producers.What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?
A) They are equal.
B) The equilibrium quantity is greater than the socially optimal quantity.
C) The equilibrium quantity is less than the socially optimal quantity.
D) There is not enough information to answer the question.

Question

Quizplus · Accepted Answer

The positive externality of $12 per shot means that the social benefit of each shot is $12 more than the private benefit received by the individual receiving the shot. With a subsidy of $5 per shot, the marginal cost for producers decreases and the supply curve shifts to the right. This results in a lower equilibrium price and higher equilibrium quantity. However, even with the subsidy, the equilibrium quantity is still less than the socially optimal quantity. The socially optimal quantity would be where the marginal social benefit (MSB) equals the marginal social cost (MSC), taking into account the positive externality. The MSC curve takes into account both the private costs and the external costs (or negative externalities). Since the externality is positive, the MSC curve is below the supply curve. The socially optimal quantity is at the point where the MSC intersects the MSB, and this quantity is higher than the equilibrium quantity. Therefore, there is market failure and the government may need to intervene to align the quantity produced with the socially optimal quantity.

Suppose That Flu Shots Create a Positive Externality Equal to $12