L6

Question 1

When are externalities present?

Answer 1

When costs/benefits of actions to other parties are not fully accounted for in decision making process tf individual interests are not aligned with societies!

Question 2

HC externality examples?

Answer 2

Negative: smoking, drinking, drug-taking
Positive: getting vaccinated, going to the doctor

Question 3

When does a negative externality occur? Draw a diagram of this?

Answer 3

When the MPB (ie. D curve) is greater than the MSB, therefore people consume at levels above the social optimum (diagram in notes)

Question 4

When does a positive externality occur? Draw a diagram of this?

Answer 4

When the MPB (ie. D curve) is less than the MSB, therefore people underconsume, below the social optimum

Question 5

When is the DWL triangle minimised?

Answer 5

When MSB=MC=MPB

Question 6

What should be the aim of any externality eliminating policy?

Answer 6

To shift private consumption quantity to the social optimum

Question 7

Why are positive externalities not welfare maximising?

Answer 7

Because they occur when MPB is less than MSB, therefore people will underconsume the good

Question 8

4 types of externality in healthcare: consumption vs production and costs vs. benefits?

Answer 8

see notes

Question 9

What are public goods?

Answer 9

They are goods that are non-rivalrous and non-excludable, tf end up being underfunded (eg. lighthouses)

Question 10

What are merit goods, why are they underfunded?

Answer 10

Goods that should be funded on basis of need (eg. health/education); since they have positive externalities, they too are often underfunded (consumers ignore the positive benefit of their contribution to society when contributing tf underpay)

Question 11

Explain the idea behind a caring externality?

Answer 11

Consumption of HC by one group improves the welfare of others - people derive utility from knowing others are well

In general, HC consumption is too low bc. consumers do not consider the positive externality when they buy HC tf -> economic argument for subsidisation of HC!

Question 12

2 examples where vaccines have been very effective?

Answer 12

1) Measles (MMR vaccine):
2. 6m deaths/yr in 1980s, now only 73,000 (2014)

2) Polio:
350,000 cases/yr in 1988, now less than 1000/yr

Question 13

3 vaccine types?

Answer 13

1) routine (babies, elderly etc.)
2) special (eg. pregnant women)
3) travel

Question 14

Who does decision of vaccines often fall to?

Answer 14

Parents

Question 15

2 Benefits of vaccines?

Answer 15

1) decrease risk of catching illness (private benefit)

2) decrease risk of passing on illness (social benefit)

Question 16

Individual costs of vaccines? (3)

Answer 16

Financial, time, side effects etc.

Question 17

Societal benefits of vaccines? (4)

Answer 17

Decrease risk of passing on illness, free-riding possibility, herd immunity (roughly 90% must be vaccinated), altruism (caring ext.)

Question 18

Draw and explain the vaccines diagram?

Answer 18

See notes
MSB>MPB for each unit consumed
See problem with it too (DWL)

Question 19

Policy solution for vaccines to eliminate the DWL? (what they must do and 2 ways to do it?)

Answer 19

Policy: need interventions to align incentives of individuals with those of social welfare (ie. go from Q(A) to Q(B), eq. output to econ. efficient output)

1) Subsidisation
2) Public provision

Question 20

Why may public provision still not completely solve the problem of underconsumption in vaccines?

Answer 20

Because still other costs (eg. time, travel, side effects etc.)

Question 21

Draw the diagram and explain how subsidising vaccines may solve the problem of underconsumption?

Answer 21

see notes for all info and diagram

Question 22

What is a pigovian subsidy?

Answer 22

When the subsidy set=scale of externality tf social welfare is maximised

Question 23

What did Nato et al. (2014) find regarding vaccines?

Answer 23

14.5% of elderly had pneumonia vaccine if they paid themselves, up to 52.1% if government paid

Question 24

Other interventions to promote vaccine consumption? (4)

Answer 24

Info. distribution
Direct provision
Regulation (mandating)
Supply-side (subsidise pharma firms so they supply them)

Question 25

Practical issue regarding direct provision of vaccines? and solution?

Answer 25

What to cover? For who? How to ensure people actually get it?

Tf maybe financial incentives/education might be more useful

Question 26

What did Johri et al. (2015) find regarding vaccines?

Answer 26

In developing countries education was more effective than provision to stimulate demand

Question 27

Normative issues with vaccine subsidisation?

Answer 27

Who should be responsible/who should pay? What are equity objectives?
poorest may still be unable to afford even with subs. tf may require direct provision
(see conclusion in notes)