A. Externalities and Public Goods (25 points)

1. Consider the market for Flu Shots in the US. Every year, many people get Flu Shots to reduce the chances of contracting and spreading the Flu.

a. What type of externality (negative or positive) is associated with Flu shots?

b. On the graph below, show the effects of this externality by drawing and labeling any additional curve (Supply or Demand).

c. In a market, without any market intervention, do you think there will be under or over production of Flu Shots?

d. What kind of actions can the government take (subsidy or tax) to incentivize socially optimal production of Flu Shots?

e. Using the concept of rivalry and excludability; explain what kind of good is Flu Shots?

b. On the graph below, show the effects of this externality by drawing and labeling any additional curve (Supply or Demand). P P 5o = Marginal Private Cost Pmarket +-- = D. Marginal Private Benefit Qmarket b. On the graph below, show the effects of this externality by drawing and labeling any additional curve (Supply or Demand). P P 5o = Marginal Private Cost Pmarket +-- = D. Marginal Private Benefit Qmarket