4. Positive Externalities & Efficiency
Based on Dr. Said's Figures 7, 8, 8-A + Handwritten Notes Vaccination Table
The Setup (Inoculation Example)
Vaccination generates positive externalities: those vaccinated benefit themselves (private benefit), but unvaccinated people also benefit because the risk of contagious disease decreases (external benefit). No external cost exists.
- Demand (D) = MPB (private benefit only - what consumers willing to pay)
- Supply (S) = MPC = MSC (no external cost, so private = social cost)
- MSB = MPB + MEB - true social benefit (private + external benefit to society)
Case 1: Constant MEB (Figure 7)
At market equilibrium E1: MPB = MPC. But MSB > MPB (because MSB = MPB + MEB). So at E1:
\(MSB > MSC \text{ at E1}\)
This means: the true benefit to society exceeds the cost - more units SHOULD be produced but aren't, because consumers only consider their private benefit. The market underproduces.
Case 2: Decreasing MEB (Figures 8 & 8-A)
In reality, MEB decreases as more people get vaccinated - because the risk to unvaccinated people keeps falling. At some point (q3), MEB = 0 and MPB = MSB.
Vaccination Table (Handwritten Notes - Key Example)
Suppose Corona virus vaccination is produced & sold in perfect competition. Each unit generates positive externality estimated at $20/unit. No external cost.
| Q | MPB | MPC=MSC | MEB | MSB | TSB=\(\sum\)MSB | TSC=\(\sum\)MSC | NSB=TSB-TSC |
|---|---|---|---|---|---|---|---|
| 1 | 100 | 60 | 20 | 120 | 120 | 60 | 60 |
| 2 | 90 | 70 | 20 | 110 | 230 | 130 | 100 |
| 3 | 80 | 80 | 20 | 100 | 330 | 210 | 120 |
| 4 | 70 | 90 | 20 | 90 | 420 | 300 | 120 |
| 5 | 60 | 100 | 20 | 80 | 500 | 400 | 100 |
| 6 | 50 | 110 | 20 | 70 | 570 | 510 | 60 |
Two ways to find it:
Method 1 (Marginal): Find where MSB = MSC. At Q=4: MSB = 90, MSC = 90. Equal!
Method 2 (Total): Find where NSB is maximized. NSB peaks at Q=3 and Q=4 (both = 120). But the EFFICIENT point is Q=4 because that's where MSB = MSC (the marginal condition).
At Q=3: MSB(100) > MSC(80) - society would benefit from one more unit
At Q=4: MSB(90) = MSC(90) - perfect balance
At Q=5: MSB(80) < MSC(100) - society loses from this unit
Market equilibrium: MPB = MPC at Q=3 (both = 80). The market underproduces by 1 unit.