You are still mayor, and the next item on your agenda is COVID vaccine policy. In particular, you have to decide whether, how, and how much to impact uptake of the vaccine in the city. Suppose the vaccine can be produced at a constant cost (i.e. perfectly elastically) of $50/person. For simplicity, assume there are 100 people in the city, and the demand curve is given by:

QD = 90 - P

So, if the price is set at $89, 1 person will get it; if it’s set at -$10 (i.e. you pay people $10 to get vaccinated), everyone will get it.

a) Discuss a few reasons why some people would be willing to pay more for the vaccine than others. In general, would people with higher incomes have a higher willingness-to-pay for the vaccine or lower?

b) Suppose that the city buys the vaccine and then sells it at cost ($50) to residents.

How many people will get vaccinated? Show the equilibrium graphically.

c) Explain why getting vaccinated could have positive externalities. In other words, if you get vaccinated, how does that help other people?

d) Suppose that the marginal social value curve of the vaccination is given by:

SB = 150 - Q 

Plot this on the same graph as part b). Does it lie above or below the demand curve? Why?

e) What is the efficient level of vaccinations given the social benefits and costs described above? In other words, how many people will get vaccinated if everyone gets vaccinated whose social benefit is above the cost (and no one else)?

f) Based on what you found in parts b) and e), explain why charging at cost ($50) for a vaccination leads to inefficiently low vaccination rates.