Positive consumption externality PDF

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[positive consumption externality, demand, subsidy] The following diagram refers to the market for flu vaccinations where the government implements a subsidy.

As can be seen, the market is initially trading quantity Qe at price Pe. The demand curve Dp refers to private benefits of consumption that is received by the consumer of the good or service. In this case, the consumption of flu vaccinations. Examples of these benefits received by the consumer would be better health and immunity to flu. However, if we wish to consider the total benefits to society for the consumption which causes positive externalities then we must consider a social demand curve Ds. This shows the total benefits of consumption, those that are received by the consumer and also the society such as lower chances of falling ill and effective working staff. Both of these curves exists although Dp is from the view of the consumer and Ds is from the view of the society. The difference between the two demand curves measure the size of the positive externality. This assumes that it is possible to quantify and measure the size of the externality. The socially optimal point to trade at which takes into account the true cost of consumption is P1Qs(Ds). However, in the free market we will trade at point PeQe which means that the positive externality is uncompensated. As a result, it can be said that there is underproduction in the market and the price is higher than it should be. Nevertheless, this problem can potentially be rectified. Subsidies can be implemented by the government into a market. These can be paid to either the consumer or producer. In this case, for the flu vaccination market, some people are not willing to take the shot because of the price. But if there is a subsidy, the price consumers pay will fall from Pe to P2 while producers still receive P1. This will shift the demand curve from Dp(PeQe) to Ds(P1Qs) which is the optimal point to trade. With this subsidy, consumption and production will increase and the market will be trading efficiently....