a. Determine whether children getting a flu vaccine carries an external benefit or an external cost. If an external cost is present, move point A and point B to show the marginal social cost curve. If an external benefit is present, move point A and point B to show the marginal social benefit curve. Place point C at the equilibrium outcome. Place point D at the socially optimal outcome. Flu vaccines Price Quantity A B C D Supply (marginal private cost) Demand (marginal private benefit)
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- Flu vaccines carry an external benefit because vaccinating children not only protects them but also reduces the spread of the flu to others. Show more…
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CASE STUDY 3: SMOKING AT IKE'S BAR-B-Q PIT By 2013, only 10 states in the U.S. had not issued statewide bans on smoking in any nongovernment-owned spaces. Ike's Bar-B-Q Pit is located in a state that allows smoking in restaurants and bars. Some of Ike's nonsmoking customers, including some who suffer from asthma, have petitioned Ike to adopt a no-smoking rule for his restaurant. Upon hearing of the petition, some of Ike's other customers complained that they have smoked in Ike's restaurant for years and would not patronize the restaurant if the no-smoking rule were adopted. Ike is greatly concerned because he does not wish to lose business from either his smoking or nonsmoking customers. Private Solutions to Externalities: The Coase Theorem Learning Objective: Discuss the Coase theorem and explain how private bargaining can lead to economic efficiency in a market with an externality. Although government intervention may increase economic efficiency in markets where externalities are present, it is possible for people to find private solutions to the problem of externalities. Ronald Coase made this argument in a 1960 article. To understand Coase's argument, it is important to understand that completely eliminating an externality is usually not economically efficient. A. The Economically Efficient Level of Pollution Reduction The optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost. This applies to reducing pollution just as much as other activities. As pollution declines, society benefits, but the marginal benefit from eliminating another unit of pollution declines as emissions are reduced. As pollution declines, the marginal cost of further reductions rises. The net benefit to society from reducing pollution is equal to the difference between the benefit of reducing pollution and the cost. To maximize the net benefit to society, any type of pollution should be reduced to the point where the marginal benefit from another ton of reduction is equal to the marginal cost. B. The Basis for Private Solutions to Externalities In arguing that private solutions to the problem of externalities were possible, Ronald Coase emphasized that when more than the optimal level of pollution is occurring, the benefits from reducing the pollution to the optimal level are greater than the costs. C. Do Property Rights Matter? Ronald Coase pointed out that the amount of pollution reduction will be the same whether polluters or the victims of pollution are legally liable for damages. Bargaining between the parties will result in the same reduction in pollution, where the marginal benefit of the last unit of reduction is equal to the marginal cost. D. The Problem of Transactions Costs There are frequently practical difficulties in the way of a private solution to the problem of externalities. For example, if many people suffer from the negative effects of pollution, bringing all the victims together with all the producers of the pollution to negotiate an agreement often fails due to high transactions costs. Transactions costs are the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services. E. The Coase Theorem The Coase theorem is the argument of economist Ronald Coase that if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities. Private bargaining is most likely to reach an efficient outcome when the number of bargaining parties is small and all parties are willing to accept a reasonable agreement. Because Ike's restaurant is not in a state that regulates smoking in public places, Ike decides to meet with his smoking and nonsmoking customers to accommodate both of their wishes regarding his smoking policy. 1) Draw a graph illustrating the externality associated with smoking in Ike's Bar-B-Q Pit 2) Explain how this externality causes a deviation from economic efficiency in this market. 3) Do you think the Coase Theorem applies to this case? 4) Suggest a solution that would be consistent with the Coase theorem, that is a solution that would enhance the well-being of Ike's customers and increase economic efficiency.
Sri K.
University is considering offering its students the opportunity to get a flu vaccine ('flu shot'). The school is considering setting up the operation for just one day during the lunch hour. For a preliminary analysis, consider the following simplified description of the proposed operation: a total of 600 students will arrive at the cafeteria during the 12:00 Noon to 1:00 PM lunch hour. The students will arrive uniformly over time with no variability. No students will show up either before or after the lunch hour. Since 20% of the students have never had a flu shot, they first must go to a nurse practitioner for a quick review of their medical history. After this review, they then join a line waiting for vaccination by a doctor. The remaining 80% go straight to the line waiting for vaccination. (It is assumed that all the students will receive the vaccine.) There are 3 nurse practitioners available to review medical histories. Each nurse practitioner can review a student's medical history in 2 minutes. There are 4 doctors giving the vaccinations. It takes only 30 seconds for a doctor to vaccinate a student. Questions: What is the maximum build-up of students at the nurse-practitioner review? What is the maximum wait at the nurse-practitioner review? At what time will the line at the review be empty? At what time will the vaccination line be empty? (Note that it might be possible for the vaccination line to be empty even though the review line is not empty.)
Adi S.
As of May 2021, 4% of the COVID-19 vaccines administered globally have gone to people in 27 wealthy nations that represent only % of the global population. Amidst this vaccine inequality in the backdrop of the pandemic in the world, every country should have the right to make its own vaccine. That's the principle underpinning the campaign to temporarily waive Intellectual Property (IP) protection on coronavirus vaccines. (a) Suppose the IP is waived (the know-how is available to everyone) and Bangladesh can make its own vaccine. Using the theories of demand-supply and market, discuss the impact of this scenario on the price, quantity, profit margins of the vaccine producing firms, consumer surplus, and producer surplus in the COVID-19 vaccine market of Bangladesh. (b) Suppose the Government of Bangladesh imposes a per-unit tax on the vaccines sold by B". Who will bear most of this tax burden and why? (c) If the IP is not waived and only one company "B" is approved for producing the vaccine in Bangladesh, how will it affect the price, quantity, and social welfare in the vaccine market? (d) If the company "B" is the sole producer of the vaccine in Bangladesh, how can it further increase profit by charging different prices based on different groups of consumers? Use microeconomic tools to analyze, frame, and explain your answer.
Manasvee S.
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