Microeconomics - AS Externalities

 Writing Skills - AS Level                         Example 1

‘The HPV vaccine is recommended for all adults in the USA because it reduces the risk of cancer by 88%. If the HPV vaccine was given to all adults 925 000 cases of cancer would be prevented. However only 18.3% of adults were vaccinated between 2011 and 2014 preventing 170 000 cases of cancer.’ 

Evaluate why only 18.3% of adults were vaccinated. (Source - Edexcel May 20019)

Possible answer - 

As we see from the case that HPV vaccine for adults in the USA has proved to be a good remedy for cancer as it reduces the risk up to 88%, any rational individual/consumer would like to save himself/herself from contracting the disease by taking the vaccine. We can also see that there is 81.7% of all adults have not taken the vaccine due to some reasons. This means they are not acting rationally. As a result vaccine production and consumption are not increasing in the country leading to positive externality existing in the market.

Well! Before I get into the evaluation let me first present my understanding on rational consumers and positive externalities.

Positive externality exists when there is a positive spillover effect of market activities on the third parties or bystanders. 

Rational consumers are those who try to maximize their utilities or benefits, when they take part in a transaction.

If the HPV vaccine was given to all adults 925 000 cases of cancer would be prevented, but, between 2011 and 2014 only 170 000 cases of cancer were prevented.  This interprets the situation in the USA as 81.7% of the all adults are not acting rationally leading to consumption and production of HPV vaccine to be lower than the quantity that is required to prevent the additional 755000 cases from spreading. This is a clear sign of positive externality in the US market leading to market failure. 

With the existence of positive externality, though it causes spillover benefits to the third parties or bystanders, it`s consumption and production are lower than the level of output that is socially optimally efficient. Let me use the graph below to explain the fact. 

Positive Externality

The graph contains quantity/output at X-axis and cost and benefit at Y-axis with MPB representing marginal private benefits of consumers or producers, MPC representing marginal private costs of consumers and producers, MSB representing marginal social benefits which includes MPB + external benefits, MSC representing marginal social costs which includes marginal private costs plus external costs. 

In this case, we assume, vaccine production has no externalities rather the consumption has got externalities. As a result, MPC is equal to MSC. 

From the graph we see, market is currently producing and consuming at Q where the price is P. The quantity and the price determined through the intersection of MPB and MPC=MSC curves. At this level of output, MSB is higher than MPB which is equal to MSC due to market equilibrium. The interpretation of this is that the third parties are enjoying the higher benefits of vaccine production and consumption by vaccine sellers and consumers but not making any payment for the benefits. 

As third parties are enjoying the benefits of the provision without buying the vaccine, so producers of vaccine have no choice but to produce less quantities. With less production and consumption of vaccine, price in the free market for cancer vaccine is considered to be high to the individual private buyers. The tenable behaviour of the third parties are not allowing the market to produce at quantity Q1 which is socially efficient causing some resources that could have been used in the market to produce more vaccines are not being used as price in the market does not go down. As a result, loss of potential welfare. This is reflected through the shaded triangle area of ACB.

At the level of output Q, point A to point C represents external benefits that society is receiving from the consumption of cancer vaccine by the consumers. Let us now identify the external benefits and find out the reasons why third parties are not consuming at Q1. 

Before I get into identification of external benefits, let me first clarify the term private benefit in order to understand the external benefits better.

Private benefits- benefits accrued to the person receiving the vaccine. This means, people who are buying the vaccine are able to save themselves from contracting the disease. Which means, they don`t have to go through the severe pain and surgeries in order to treat the disease. The private consumer of the vaccine will also be able to save themselves from paying a lump sum money to treat cancer, if not vaccinated. It has been seen in developing countries that many people sale out their properties in order to treat a disease like cancer. 

External benefits- spillover benefits to third parties out of consumption and production of a good. As people take the vaccine, they not only protect themselves from contracting the disease but also protect others from contracting the disease. As a result, third parties do not have to bear the pain of the disease mentally and financially. They may not have to sale out their properties (in some cases) in order to treat the disease. Third parties may have safe and secured life for them and their families without realizing the benefits of taking the vaccine. 

To identify further benefits, as the disease is not transmitted among third parties so they can lead their lives normally, which means working and earning money as usual.

Now let me analyze the reasons why there is a positive externality leading to market failure in the USA.

One of the main reasons for market to be failed in USA is consumers are not acting rationally. Let me discuss why consumers may like to be irrational though there is an advantage to act rationally.

Habitual behaviour – the habitual behaviour represents the shortcuts in decision making by the people in general. As people in general have habits not to gather all the information they need to make a good decision due to their perception of having been able to make a good decision with a part of the information. So they sometimes act irrationally to choose the right thing for them. Here in this case, As people are not accustomed to take vaccines regularly so they might have been driven by their rule of thumb habits which may not have allowed them to have the proper knowledge of the benefits of the vaccine. As a result, some people might have acted irrationally and did not take the vaccine.

Information Gaps – Information gaps entails that the buyers or sellers or both may not have the proper information to make a decision which can make the market allocation more efficient. In our case, this could be the reason why people have not taken the vaccine as they didn`t have enough information about the benefits of vaccine which they can compare with the cost they would incur in the form of price. As a result, some people might have considered not to take the vaccine, which explains why they had acted irrationally.

Inability to compute the benefits – Buyers always avoid putting mental effort to calculate the cost or benefit or both of a transaction if they don`t feel it is necessary.  In our case, it is likely that people might have not put enough mental effort to understand the benefit of the vaccine partly because of the lack of proper information. In order to calculate the benefits of vaccine one needs to take his/her time to gather the information one after another and then find out the benefits out of the information. After that, there would be a need of putting monetary value onto those benefits and then compare with the cost they have incurred. From the analysis above it seems, People had to do a lot of calculations in order to take a rational decision, which unfortunately, people in our case might have not done due to not having proper information leading to their inability to calculate the benefits of the vaccination.

Inertia – Inertia is a state of mind when people avoid to be involved in some activities that they consider troublesome or do not worth taking part of. In our case, some people might have the inertia due to that they did not take part in the vaccination process. It does not take time to guess that people are generally busy with their daily routines anywhere across the world. As a result, they might have considered it does not worth going for the vaccination for which they might have to stand on a queue for hours or may have to arrange the appointments. As a result, they might have acted irrationally leading to 81.7% of all adults were not vaccinated.

Influence of others – Though theoretically buyers are rational to maximize their benefits out of a consumption or purchase  individually but, in reality they are influenced by others such as family, friends and advisors. In our case this might be the reason why people have not considered taking the vaccine. For example, some people might have seen that their friends are not taking the vaccine, so they might have chosen not to take the vaccine. Others, might have seen that there was no one contracted the disease around them making them convinced of not worth taking the vaccine.

The other reasons could be the government failure in spreading the awareness, fear of side effects and income effects etc. 

The Government failure in spreading the awareness - the government failure to entice people to go for the vaccine. It is possible that the government in the USA was not that much active (between 2011 to 2014) to spread the disease prevention awareness among the people leading to people not taking the vaccination seriously. This must have led the 81.7% of the all adults not taking the vaccine.

However, there are many reasons analyzed above why there was only 18.3% of the all adults were vaccinated, which may not show us the true picture of the situation.

Efficiency of the vaccine - though the case study tells us the vaccine has got efficiency up to 88% to reduce the risk of getting cancer, but, it may not be absolutely true as the number could be a scientific estimation which depends on probability, which may not be 100% correct. This might have led people not to consider taking the vaccine. As a result, people might have made a rational decision. It would be right to take a vaccine, when it is 100% evident.

Size of the external benefits -  it is possible that government was not able to spread the awareness about the vaccination among people due to having no idea that how much efforts they should put into spreading the information. In order to decide proper measures to spread the information government first need to know the size of the external benefits, which is unfortunately, very hard to know as government may not have the perfect information.

The Government failure in spreading the awareness - the government failure to entice people to go for the vaccine. It is possible that the government in the USA was not that much active (between 2011 to 2014) to spread the disease prevention awareness among the people leading to people not taking the vaccination seriously. This must have led the 81.7% of the all adults not taking the vaccine.

Fear of side effects - some adults may have considered not to take the vaccine cause they feared that there may have side effects such as unwanted health issues. Which might lead them going through unwanted surgeries or cost a lot of money to cure back. As a result, not taking the vaccine could be a rational decision.

Income effect - there is no information about the provision of the  vaccine by the government freely. So we can assume that adults had to buy the vaccine from the market in order to inoculate themselves. It is possible that the price of the vaccine was high which caused many people not being able to buy. People would find it unnecessary to inoculate the vaccine if it is unlikely to contract the disease. In this case, considering their situation, if they have not taken the vaccine then it would be considered as a rational decision.

Its a matter of time - it is possible that people have not vaccinated them for sometimes but as the time goes by they will vaccinate them gradually. As a result, it would unnecessary to declare the consumers are irrational.

Lack of awareness about external benefit among people - it is possible that most of the people in USA are not aware of the external benefits of vaccine or may be not aware of the benefits of the vaccine leading to low vaccination. In such case, it would not be ideal to say adults are irrational in USA.

In conclusion, I must say that there may not have one factor that might have led the vaccination be limited to 18.3% rather all the factors have played their role to some degree to make it failed.