2022 JC2 H2 Prelim Essay Q3 (Suggested Answers).docx

3 To ensurethesuccessofvaccinationasatoolinCOVID-19pandemicpreventionandcontrol,ahighvaccinationrateinacountryisrequired.However, despitethevaccinesbeingprovidedfreeofcharge,vaccinehesitancyisstillprevalentinsomecountries due to the spread of misinformation. (a) ExplainhowconsumersactrationallytodecidewhethertotaketheCOVID-19vaccineandthelikelyimpactoftheirdecisionsonresourceallocationintheCOVID-19 vaccine market. [10] (b) Discusshowgovernmentinterventioninthemarketforvaccinescouldleadtosocialwelfarebeingmaximisedandconsiderhowlikelysuchinterventionwillachieve this aim. [15] Suggested AnswerPart (a)IntroductionA rationalconsumerseeksto maximisehissatisfactionornetbenefit.In decidingwhetherto consumea good,theconsumerwillapplythemarginalistprincipleandconsiderthe marginalprivatebenefit(MPB)andmarginalprivatecost(MPC)ofconsumingthegood.TheMPBreflectsconsumers’additionalbenefit(i.e.satisfactionor utility)fromconsumingthelastunitof thegood/ service.TheMPCreflectsconsumers’ additional cost to consume the last unit of good / service. How consumers act rationally to decide whether to take vaccineTheconsumerwilltakehisMPBandMPCintoaccountin decidingwhethertotakeCOVID-19vaccine.TheMPBofconsumingthevaccineistheprotectionandsavingsonmedicalcostsheenjoysduetoloweredchancesoffallingillafterbeinginfectedwiththevirusandminimizingtheriskofspreadingthevirustohishousehold.TheMPCisthecostof vaccinationincurred.Otherthantheexplicitcost,i.e.thepriceof thevaccine,italsoincludestheopportunitycost,thenextbestalternativeforgoneintermsof othergoods,e.g.food,hecouldhavepurchasedwiththatamountofmoney. Hecouldalsohavespentthetimeallottedfor thevaccinationonotheractivitieslikewatching a movie instead. Withreferenceto Figure1, if hisMPBhigherthanMPC,at Q1 , theconsumerwillproceedtotakethevaccination.However, ifhisMPBislessthanhisMPC,atQ2 , theconsumerwilldecidenottotakethevaccination.Hence,theconsumerwillconsumeuptothepointwhereMPB= MPCatQp.Atthispoint,theconsumermaximiseshisnetbenefit as seen by the area abc.

How positive externalities can lead to under-allocation of resourcesHowever, consumptionof thevaccinationgeneratespositiveexternalities,whichthirdpartycanenjoy(externalbenefit)aswell.Vaccinationshelppreventthespreadofvirusesto thecommunityat large.Thoseinthecommunityarenowlesslikelytobeinfectedasthereis onelesspersonwhohasthepotentialtotransmitthevirus.Thecommunitywillbenefitfromsavedmedicalexpenses,andtheeconomybenefitssincelessman-hoursislosttoworkersbeingill.Thisexternalbenefitisnottakenintoaccountbytheconsumersin theirdecisionmakingastheyonlyconsidertheirMPB.Theexistenceofmarginalexternalbenefit(MEB)resultsinadivergencebetweenMPBandthemarginalsocialbenefitMSBasseenin thediagramabove,wheretheMSBliesabovetheMPB,withtheverticaldistancebetweenMPBandMSBrepresentingMEB.Thesociallyoptimaloutput,0Qs,iswhereMSC=MSB.Between0Qpand0Qs,MSB>MSC.Assuch,atoutput0Qp,societyvaluesanadditionalunitofvaccinationm