Positive Externalities of Consumption

Although some scientists (and self-labeled "experts") question the effectiveness and risk of inoculations (i.e. shots), many people argue that providing vaccinations against various diseases like H1N1 and the mumps prevents such illness from occurring. If I pay to get a shot for H1N1 because I do not want this flu, then I also will not pass this flu to those around me. However, those around me did not have to pay for my inoculation even though they reap the benefits. Therefore, the marginal social benefit of inoculations is greater than the marginal private benefit which does not include society's benefit from less infectious people (MSB > MPB). This is an example of a positive externality of consumption.

The free market for inoculations sees equilibrium at quantity Q1 (and price P1) which is below the socially efficient level of output Q*. Between Q1 and Q*, MSB > MSC and a potential welfare gain is possible (yellow triangles).


What can the government do to intervene in this market failure to achieve this potential welfare gain? First, they could subsidize the consumption of such forms of health care to make the consumption of such goods/services cheaper. In the graph, this is shown by the orange MSC + subsidy curve which reduces the price of inoculations (to P2) and increases quantity to the socially efficient level Q*. However, when governments spend money on subsidies, there is always the argument that this money could have been spent elsewhere (opportunity cost).

Another option would be to spend taxpayer money for a positive ad campaign that would encourage the community to get inoculated against various diseases like H1N1. The aim of this campaign would be to increase consumers' private benefit / utility for consuming vaccinations because they would feel better about protecting themselves against disease. Graphically, this is shown by the orange arrow indicating a rightward shift of MPB towards MSB (and thus Q*). Of course, the opportunity cost argument would apply here as well and often some members of the community are very critical of vaccinations.

Other possible government interventions include forcing the public to get inoculated which might violate civil rights.