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Homework answers / question archive / Q3: Externalities and Coase Theorem (10 points) CBC news: For months, more than 150 teams around the world have been working at an unprecedented pace to develop a vaccine against the new coronavirus

Q3: Externalities and Coase Theorem (10 points) CBC news: For months, more than 150 teams around the world have been working at an unprecedented pace to develop a vaccine against the new coronavirus

Economics

Q3: Externalities and Coase Theorem (10 points) CBC news: For months, more than 150 teams around the world have been working at an unprecedented pace to develop a vaccine against the new coronavirus. Ten of those vaccine candidates are now in Phase 3 clinical trials, in which each is given to thousands of people to ensure it's both safe and effective - the final leg of the process before their potential approval. In the fight against COVID-19, that feels like a light at the end of a long, dark tunnel. But once at least one vaccine is approved, what comes next? "Approval itself is not going to be an overnight solution," said Matthew Miller, an associate professor at the Michael G. DeGroote Institute for Infectious Disease Research at McMaster University in Hamilton. "There's going to be a significant amount of time required to distribute the vaccine and then have enough doses prepared to administer to the population." Public health and vaccination experts also say the months after Canada starts acquiring a vaccine will be rife with challenges, both logistically and ethically, as public health officials will need to determine which groups should get priority access be it health-care workers or other vulnerable demographics - as production scales up to meet demand. "There will inevitably be supply chain issues," Miller warned. "It's going to take time for the vaccine manufacturers to produce enough doses, and there's going to need to be prioritization over who will get those first doses when they become available." For the news above, please answer the following: (1). Does an externality exist? If so, classify the externality as positive/negative (or both). (2). If an externality exists, determine whether the Coase theorem applies. Explain why or why not. (3). If an externality exists and the Coase theorem does not apply, argue which of the government's tools are best suited to address the issue. List all the government tools that you have learned and explain.

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1) Yes there exists a positive externality as the Marginal Social Benefit is more, hence the society wants more of the good and they are willing to pay more for it. We have a situation where Marginal Social Benefit (MSB) is actually higher than the Marginal Private Benefit (MPB)

We have at first the equilibrium point at E1 and because MSB is higher than MPB by MEB (marginal external benefit) hence consumers are willing to get Q0 amount of vaccines (higher amount) and because of that they are willing to pay a higher price too at P0 and the equilibrium that is socially optiimal is E0.

b) Coase theorem applies when both parties can solve their problems privately. For example, a person is constantly hearing loud music from the top floor neighbour and because of that he cant get good sleep. The name of the person is Ram. Ram bears a cost of $300 lets say from loud music. Now the person by listening loud music (the neighbour) gets a benefit of $200.

So what Ram can do is pay $250 to the neighbour in order for him to stop playing music, which he will happily do because he is getting more benefit than listening music and Ram is also happy because he had to pay a lesser amount than the cost he is bearing.

If externality exist then Private solutions generally work. But in this case one cannot pay doctors any amount in order to get the work done as per their convinience. Several tests have to be conducted before that and all the process should go through a proper phase, doctors also cannot give any random vaccines to people at mass. Hence to make it available in a full scale, it is indeed going to take time and course theorem will not work.

c) As we observed before that the government observes that there is a positive externality and society wants more of the vaccines. Hence in order to make the process more smooth, the government can give subsidies to the medicine makers so that more and more doctors come forward with an incentive to help in this issue, because without proper funding it is difficult to work. Hence by subsisdy they can help increase the demand and the society may in future reach to its socially optimum point which is desirable.

Also by reducing taxes in these areas, government can decrease the liability of the researchers hence they can work. Hence increasing the demand and move to the socially optimal.

Also funds should be made available when needed in these research areas.

The best solution according to me is more and more subsidies and financial help

please see the attached file 

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