3801 Semester 1 2011 Page 12 of 12 B3 -(10 MARKS) Whoop

3801 Semester 1 2011 Page 12 of 12 B3 -(10 MARKS) Whooping cough is on the rise: the number of recorded sufferers has increased noticeably in the past few years. Whooping cough is a serious and highly contagious respiratory infection. It causes some suffering for adults and teenagers but it is particularly dangerous for infants. The latter group is affected more seriously and it may be fatal in extreme cases. Immunisation is the best way to prevent the disease and the spreading of it. However very few individuals actually get a vaccination. Suppose demand for vaccination against whooping cough is Q=200-2p and supply can be represented as 4 p 22 Q. Suppose the external benefit to society of immunisation is 4B Q . The government considers subsidizing individuals to get immunized. a) What is the market equilibrium without any government intervention? Compute it and draw it in a well-labelled diagram. Note: draw a large and clear figure since you will need to add to it in parts (b) and (c) of this question. [1 mark] b) What is the social optimum in this market (price quantity) and the resulting deadweight loss without government intervention? Compute and clearly indicate both of these in the diagram from part (a). [2.5 marks] c) What is the optimal subsidy per vaccination? Explain briefly why and clearly show your answer in the diagram from part (a). [2.5 marks] d) In case study 4.2. (How can we unjam traffic jams?) and 4.3 (Why would we want to trade pollution?) there was a discussion about different ways to address externalities. Discuss alternative mechanisms to address positive and negative externalities [4 marks].
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