Vaccine Externalities by Mitra L. '07

So in my previous entry, I talked about how the Medlinks were providing free flu shots in the student center. WELL it turns out my suitemate Gabe ’08 got one today, but I didn’t end up getting one for myself. In 14.21J: Health Economics, a class in which I had an exam today, we recently modeled this sort of behavior.

Basically, vaccines have positive externalities because I am benefitting from the fact that Gabe has the vaccine (decreased odds that I’ll get sick) in a way for which I do not compensate him. Read on, grasshopper.

Here’s a simple derivation of the private demand curve. This curve will be what Gabe uses to decide whether he should get the vaccine or not.

One potential policy implication is that we should subsidize vaccines such that at the subsidized price, the private demand curve will be at the socially optimal quantity (in this case, proportion).

NOTE: Technically, my cost/supply curve (in this case, we made supply perfectly elastic) should be at P=0 since Medlinks provided the vaccine for free. My bad. You may be wondering how governments (or, in this case, universities) subsidize something that they are offering for free. What they can do is impose a fine on *not* consuming the good, but still offer the good at a price of P=0. It’s a weird kind of subsidy, but it works.

It takes another three pages to derive the social demand curve. This curve takes into account the positive effect that getting the vaccine has on other people. In order to reach the socially optimal proportion of people in the population who have the vaccine, each individual should use the social demand curve. However, since they don’t get compensated for the positive effect they exert on others, they will underconsume the good, and a proportion lower than the social optimum will get the vaccine.

(Open up the images in a new browser to see larger versions of them.)

An example of a negative externality is antibiotic resistance; by consuming a certain kind of medicine, I am making others worse off because I increase the growth of mutant strains against which the medicine is no help, and I am not compensating others for this. If I had to pay others for the cost of increased likelihood of mutant strains every time I took this medicine, then it would not be an externality because I am compensating others for my consumption. In this case, using the private demand curve causes me to consume more than the social optimum.