Your consulting firm has been contracted by the government of San Escobar to provide recommendations regarding influenza immunizations. Currently, the government of San Escobar does not intervene in the market for flu immunizations in any way and the market is best characterised as perfect competition. Assume that there is an equal number of older adults (+65 years old) and younger adults (18-22 years old) living in San Escobar. Assume also that each citizen buys their own immunization.

Influenza (the flu) is a highly contagious disease, usually prevented by vaccination and treated by managing symptoms. Spread by body fluids from infected people, symptoms include a runny nose and sore throat. Flu can affect anyone. The same vaccination is given to all age groups and equally effective for each age group.

(1) Juliette, who is one of the consultants on your team, says that the rate of flu immunizations is lower than socially optimal. Explain why you think she made this statement. Use both words and a graph to illustrate your answer. [1pt]

*Answer I have* (Couldn't insert graph)

The rate of flu immunization is less than socially optimal because when one person takes immunization he safeguards himself as well as those around him. The impact on those around him is considered to be a positive externality because the individual does not take that into account. each person takes immunization to protect himself from influenza and it benefits more than just him/her. That is why, the rate of flu immunization is lower than socially optimal because each person is to think beyond immediate benefits to himself.

In the figure below, Q denotes a socially optimal outcome which is more than the market quantity. The socially optimal outcome can be achieved if there is an increase in the quantity demanded of immunization which can be achieved by creating awareness about the benefits of the same.

(2)After doing some research, Daniel reports to you that influenza is especially dangerous for older adults (over 65 years old) and that they are aware of these risks. He also found out that young adults (18-22) interact (face-to-face) with approximately 53 other people each day, while adults over the age of 65 interact (face-to-face) with approximately 5 other people each day. Daniel suspects that this may be relevant for Juliette's comment regarding socially optimal levels of immunizations. In particular, Daniel says that the rate of immunizations among older adults is much more below what is socially optimal than the rate of immunizations among young adults. Do you agree with Daniel? Explain your answer using both graphs and words. [3pt]

*Answer I have* (Couldn't include graph)

We assume that the private marginal benefit (PMB) is the same for older adults and young adults. Private marginal cost (PMC) is equal for both groups, too.

Since older adults are more at risk of death if they catch the flu, compared to the young adult group, it means that the immunization has a higher marginal external benefit (MEB) than it does for the young adult group. As a result, the social marginal benefit (SMB) curve for older adults will lie further to the right of the SMB curve for young adults.Therefore, both the optimal price and an optimal number of immunizations are higher for older adults, which means that the immunization rate for older adults is much below the socially optimal immunization rate for young adults.In the following graph, the market outcome for both groups is at point A where PMB intersects PMC with market price P0 and market output Q0.

MEB for older adults being MEB1 and MEB for younger adults being MEB2, the SMB for older adults is SMB1 and SMB for young adults is SMB2 (lying to the left of SMB1).For older adults, the efficient outcome is at point B where SMB1 intersects PMC with efficient price P1 and efficient output Q1. For young adults, the efficient outcome is at point C where SMB2 intersects PMC with efficient price P2 and efficient output Q2.

As is seen, Q0 < Q1 < Q2.

(3) What financial intervention would you recommend the government to use to bring the rates of immunization to socially optimal levels? Explain the mechanism through which this intervention works. Would this intervention be the same in each age group? If no, how would it differ between the age groups and why? [3pt]

*Answer I have* (Couldn't insert graph)

The government will intervene financially by providing subsidies to the supplier/producer of the vaccine, making it available at a lower price. And at this price, the immunization gets cheaper as more people get immunized, the socially optimal level of immunization is achieved.

This intervention is the same for all age groups(adults and senior citizens) as the same vaccine is required for all citizens.

This mechanism is explained using a graph in the explanation section.

Step-by-step explanation

In San Escobar, the flu is contagious and is affecting the citizen's health, so the government has to take a step to increase immunization up to SO(socially optimal) level.

To enable this, the government should support the manufacturers/producers of vaccines by providing subsidies on inputs used in producing vaccines. This will reduce the cost of production, and the immunization will be available/provided at a lower cost.

The mechanism is shown by the graph below.

When there is no intervention by the government, the E(equilibrium) is at E1 where the SMC(social marginal cost), that is cost to producers/suppliers, and citizens paying for vaccines and the benefit of private immunization are equal, that is, PMB=SMB. At this price, P1, a socially optimal level is not achieved which is at Q* because immunization is expensive at P1 price. So, the government will provide subsidies that will lower cost at P2, where PMB= (PMC-s) at this price, as PMC(private marginal cost) gets reduced, more people will buy immunization, and the socially optimal level of immunization will be achieved.

The financial intervention is the same for each group because the same vaccine is used by adults and senior citizens, and is available at a reduced price.

(4) What non-financial intervention would you recommend the government implement to bring the rates of immunization to socially optimal levels? [1pt]

(5) The government asks you whether instead of using financial intervention, consolidating the existing firms producing influenza immunizations into one firm would help bring the vaccination rates to the socially optimal level. Please provide your response, including graphs. [2pt]

(6) Finally, the Noise Association of San Escobar got in touch with you saying that the factories producing influenza immunizations are very noisy and currently have their production lines working non-stop (24 hours per day). Upon further investigation you find out that the noise from the factories negatively impacts many residents and businesses. Does this change your response to question 1)? If yes, explain how. Does your response to question 3) change? Illustrate your answer using a graph. In your answer explore scenarios with different levels of noise. Assume that what Daniel found out still holds and include this information in your answer. [5pt]