If positive externalities exist in the market for flu shots, which of the following is most likely to occur in a free market without government intervention?

• A. The market will provide exactly the socially optimal quantity of flu shots.
• B. The quantity of flu shots provided will be greater than the socially optimal level.
• C. The quantity of flu shots provided will be less than the socially optimal level.
• D. There will be no impact on the market quantity of flu shots.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of positive externalities. A positive externality occurs when a good or service provides benefits to third parties not directly involved in the transaction. In the case of flu shots, individuals who get vaccinated reduce the spread of the flu to others, creating additional social benefits beyond the private benefits to the vaccinated person.
2. Step 2: Recognize that in a free market without government intervention, individuals make decisions based on their private benefits and costs, ignoring the external benefits their actions generate for others. This means the private marginal benefit (PMB) is less than the social marginal benefit (SMB).
3. Step 3: Recall that the socially optimal quantity of a good with positive externalities is where the social marginal benefit equals the social marginal cost (SMB = SMC). However, in the free market, the quantity produced is determined where private marginal benefit equals private marginal cost (PMB = PMC).
4. Step 4: Since SMB > PMB due to positive externalities, the free market equilibrium quantity will be less than the socially optimal quantity. This is because individuals undervalue the total benefits of flu shots, leading to underconsumption.
5. Step 5: Conclude that without government intervention, the market will provide fewer flu shots than is socially optimal, resulting in a market failure where the positive externality is not fully realized.