The existence of positive externalities in a free market has the potential of denying a number of people access to vaccination against contagious diseases like would be expected in an optimal social market. This is because when substantial positive externalities are in existence, services or goods in the market are likely to be under supplied or under consumed since a free market does not consider their effects (Baumol & Blinder 2009, p. 129). The free market fails to consider the effects of the positive externalities because marginal social benefits of purchasing the service or good supplied are greater to private marginal benefits.
Vaccination against infectious diseases is a positive externality since the marginal social benefit of undertaking the activity exceeds the marginal private benefit of offering the service (Arnold 2001, p. 71). The existence of positive externalities in the medical sector has the potential of causing the social benefit of the service to the healthcare firms being greater than the private benefit to an individual firm in a free market. Marginal social benefit is the aggregate of marginal private benefit and incidental benefits that might be negative or positive (Stonecash 2011, p. 57). The marginal social benefit is attained by others without paying for the benefit. Marginal private benefit is the proportion of marginal benefit that individuals involved in undertaking the activity receive (Taylor & Weerapana 2012, p. 46).
The marginal social benefit that will be received by the society when vaccination of infectious disease is offered will be greater than the marginal private benefit that private firms offering the vaccination service will receive. This will see the number of people being vaccinated being greater by private firms in a free market compared to the number of people being vaccinated under positive externalities as illustrated in the graph below. The graph below illustrates that 400 people will access vaccination in a free market where the marginal private benefit intersects the marginal revenue while only 200 people will access the vaccination where the marginal social benefit intersects marginal revenue.
Average total cost and marginal cost have a relationship that is reflected in a graph on the movement of both curves. Whenever the marginal cost curve is on the lower side of the average total cost curve, the latter tends to move downwards. Similarly, when the marginal cost is higher than the average total cost, average total cost has a rising trend (Boyes & Melvin 2012, p.114). This is because if an extra unit that is produced causes the average cost to be higher than the previous average cost of production, it will pull up the a new average cost of a unit.
Similarly, if the average cost lowers after an extra unit is produced, the latter will drag the average total cost curve downwards. Marginal cost is the considered price that a rational firm should consider to avoid incurring losses (Gillespie 2011). Consequently, if the marginal cost as the price of the unit produced is lower than the average cost of producing that unit, average cost will take a downward trend to save the firm from incurring huge losses. Furthermore, when the marginal cost is above the average total cost, the latter will tend to rise towards the former. The relationship between them has a significant corollary.
Marginal cost curve will intersect the average total cost at its lowest point. This is because marginal cost is below average total cost at the lowest output level that causes the average total cost to be on a falling trend. This is the minimum average total cost a firm should undertake to remain competitive in the market. An increase beyond this point causes the firm to incur losses since the average cost of producing one unit will be higher than the price of selling that product as illustrated in the figure below.
Economic efficiency is an essential economic concept that allows one to identify how market structures affect allocation of resources. There are two types of economic efficiency, namely allocation efficiency and productive efficiency. Productive efficiency is achieved when a firm manufactures at the minimum point of the average total cost curve. Allocation efficiency is achieved when the price of the unit produced is equivalent to marginal cost of production (P = MC) (McEachern 2012, p. 75). Consequently, a perfectly competitive market is capable of leading to an efficient production and allocation of resources since the firms produce at the lowest average total cost, and the price of the units is equal to marginal cost as illustrated in the graph below.
In a perfectly competitive market, firms are price takers when they sell at the price ruling in the market. Price-cutting cannot help a firm in attracting more sales or market share. This implies that the firms, in the long run, will be selling their products at the point that maximizes their profit, the point when price is equal to marginal cost (McEachern 2012, p.93). Similarly, firms in a perfectly competitive market have access to the market information that is likely to reduce costs. All the firms will have access to information that has ability to reduce costs to attain supernormal profits in the long run. This means that attainment of the supernormal profit in a perfect market is temporary as all the firms will utilize the new production level that has the least average cost.
Arnold, RA 2011, Microeconomics 10e. South-Western Cengage Learning, Mason, OH.
Baumol, WJ & Blinder, AS 2009, Economics: Principles and policy. South-Western/Cengage Learning, Mason, OH.
Boyes, WJ & Melvin, M 2012, Microeconomics. South-Western Cengage Learning, Mason, OH.
Gillespie, A 2011, Foundations of economics. Oxford University Press, Oxford.
McEachern, WA 2012, Economics: A Contemporary Introduction. Cengage Learning, New York.
Stonecash, RE 2011, Principles of macroeconomics. Cengage Learning, South Melbourne, Vic.
Taylor, JB & Weerapana, A 2012, Principles of microeconomics. South-Western Cengage Learning, Mason, OH.