(2019) A Level H2 Econs Paper 2 Essay Q3

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3. There was a serious outbreak of flu (influenza) across the world at the beginning of 2018. In many countries, vaccinations were provided free of charge to the most vulnerable people and various Health Authorities urged the elderly and children to get vaccinated as soon as possible. 
(a) Explain why vaccinations against infectious diseases, if left to market forces, might be allocated undesirably. [10]

Information Failure 

Perceived costs > actual costs 

1. In many countries, due to fake news and inaccurate interpretation / dissemination of information, many believe for example, measles vaccinations to have severe negative side effects such as causing autism 

2. This causes individuals to perceive the costs for measles vaccination to be higher than the actual costs 

3. Since individuals consume at where perceived MPC = MPB instead of actual MPC = MPB, they underconsume at Qm instead of Qs as seen in Figure 1 below 

Actual benefits > perceived benefits 

1. In many countries especially in poor developing countries with undeveloped rural areas, there is not enough education on the positive benefits associated with vaccinations such as flu vaccines / HPB vaccines 

2. The lack of information cause individuals to perceived the benefits for such vaccinations to be lower than the actual benefits 

3. Since individuals consume at perceived MPB = MPC instead of actual MPB = MPC, they underconsume at Qm instead of Qs as seen in Figure 2 below 

Positive Externalities 

1. When individuals consume vaccinations, they only account for their own private costs (such as cost of treatment) and private benefits (better immune system / health). 

2. Individuals thus consume vaccinations at where MPC = MPB 

3. Vaccinations confer external benefits to third parties (MEB) as an individual who is vaccinated is less likely to spread diseases to people around them (and when sufficient % of society is vaccinated, herd immunity is gained, protecting vulnerable individuals such as infants) 

4. Presence of MEB causes divergence between MSB & MPB.  

5. Underconsumption takes place since socially optimal level of consumption is at Qs instead of Qm.  

(b) Suppose the government decides to intervene in the market and subsidise vaccinations against infectious diseases. Discuss whether government subsidy is the best policy to ensure vaccinations are allocated desirably. [15]

How a government subsidy should work 

1. A government subsidy will increase the supply for vaccinations 

2. This will shift the supply curve from SS0 to SS1 in Figure 1 below 

3. The amount of vaccinations produced/consumed will shift from Qm to Q1 which is an output level that is closer to the socially desirable level Qs 

What a government subsidy fails to resolve + issues 

1. The gap is not completely eliminated, i.e. Q1 is not Qs, most vaccinations will likely still be significantly under consumed even with the presence of subsidies.  

2. A certain % of population needs to be vaccinated for herd immunity to take place 

3. A subsidy doesn’t address the issue of information failure, e.g. people who are convinced that vaccinations are bad for them due to fake news / misconceptions will likely continue to not consume vaccinations in spite of the subsidies provided 

4. Government subsidies can also be costly and hard to manage for governments with tight budgets. 

Why alternative policies may be more appropriate 

1. Legislation -  to ensure that vaccinations for certain highly infectious yet fatal diseases to be made mandatory 

2. Education – to correct the information failure problem 

3. Government provision – can allow for economies of scale 

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