Chapter 17, Problem 12P

To determine

Draw a diagram that shows the price for the vaccine that would arise if the company is unregulated, and label it Pm. What is the efficient price for the vaccine? Show the deadweight loss that arises from the price Pm.

On another diagram, show the lowest price that the regulator can enforce that would still induce the pharmaceutical company to develop the vaccine. Label it P*. Show the deadweight loss that arises from this price. How does it compare to the deadweight loss that arises from the price Pm?

Suppose you have accurate information about the pharmaceutical company’s fixed cost. How could you use price regulation of the pharmaceutical company, combined with a subsidy to the company, to have the efficient quantity of the vaccine provided at the lowest cost to the government?

Concept Introduction:

Marginal Social Cost - It refers to the change in the total cost to the society by the production of an additional unit of a commodity. It is the sum of marginal private cost and marginal external cost.

Marginal Social benefit - It is the change in the total benefit to the society by the consumption of an extra unit of a commodity.

Deadweight loss - It refers to the loss that occurs due the market activities to the society. It is a loss of economic efficiency that takes place during disequilibrium.