Externality Framework

TIP

• Use this framework when the questions on "Why Market Fail"
• You will need to contextualise your answers

Explain why the market fails for vaccinations

Step 1: Explain MPB, MPC & Qe

• MPB: Satisfaction of being healthier with less pains and worries from additional unit of healthcare being consumed
• MPC: Additional cost of taking the vaccination and check-ups
• Qe: Self-interested consumers will only consume @ Qe where MPB = MPC to maximise utility

Step 2: Explain Positive Externalities

• Consumption of these healthcare services lead to positive externalities
• For example, an individual who is vaccinated is less proned to contracting the virus and will be more productive in work. This will help the company earn more with greater profit levels.
• However, the firm do not pay for this benefit receive which causes a divergence between MPB & MSB

Step 3: Explain Qs

• Assuming there is no negative externalties, MPC = MSC
• Socially optimal level of output occurs when MSB = MSC at Qs

Step 4: Compare Qe and Qs

• Since Qe < Qs, there is underconsumption of healthcare services

Step 5: Explain Deadweight Loss

• Between Qe and Qs, MSB > MSC, which implies that the additional benefit due to healther individuals in society is greater than the additional cost incurred to society for providing the vaccination
• Underconsumption of vaccinations and a welfare loss of ABC (diagram)

TL;DR:

• Step 1: MPB, MPC, Qe
• Step 2: productivity & profits
  • Try to link all the externalities to the gain of productivity and profits
• Step 3: Socially Optimum level (Qs)
• Step 4: underconsumption
• Step 5: welfare loss, benefit > cost