SECTION A: Microeconomics (Total: 40 Marks)

California announces $116.5 million in vaccine incentives as demand dips

By Katerina Ang, Erin Cunningham, Paulina Firozi and Hannah Knowles

May 27, 2021|Updated May 28, 2021 at 1:11 a.m. EDT

California on Thursday became the latest state to announce huge cash prizes to incentivize vaccination against the coronavirus, offering $116.5 million in giveaways many smaller payments as well as a final drawing for 10 winners of $1.5 million each.

As rates of vaccination slow, more state and local leaders are getting creative to boost an urgent effort to protect Americans from covid-19 and get communities back to normal. Some incentives are more modest: free fries, bouquets or alcohol. (Louisiana, for instance, recently debuted "shots for shots.") But Ohio Gov. Mike DeWine (R) upped the ante this month when he announced a multimillion-dollar lottery. Soon, other states followed suit.

Some have questioned the strategy's cost-effectiveness, and one reporter asked Gov. Gavin Newsom (D) at a Thursday news conference whether he ever thought California would have to spend so much to get people to get free vaccinations against a deadly disease.

"The cost of not getting vaccinated is exponentially, incalculably higher," Newsom said.

Task 1:

Apply the economic concept of externality to explain why some individuals are sceptical of Covid 19 vaccine while the government is urging people to take the vaccine.

Task 2:

Use a demand and supply model to illustrate the impact of the externality of COVID19 vaccine on the private market equilibrium. In particular, you need to illustrate why the private market equilibrium does not give an efficient allocation of resources.

Task 3:

What does the incentive of $116.5 million incentive in vaccine tell us about the magnitude of the external effect?

Task 4

In the current situation the COVID19 vaccine supplier is almost in a monopoly position. According to economic theory on monopoly producers, the monopoly producer will restrict the quantity of output in order to maximize its profit.

Assuming the demand curve D is the marginal social benefit curve, please use the concept of allocative efficient to identify the efficient equilibrium quantity and discuss how, according to your opinion, the efficient equilibrium quantity can be realised.

(5 marks for a good explanation and 5 marks for a correct diagram.)