Teaching vaccines using internal-to-the-market externalities

Textbook models of externalities tacitly assume that those externalities fall upon individuals “outside” of the market. In many contexts—including common undergraduate examples—externalities fall “inside” the market instead. Positive externalities associated with vaccination, for instance, accrue to other individuals who would potentially demand vaccines and affect their willingness to pay. The authors describe an undergraduate-accessible alternative diagrammatic approach to such internal-to-the-market externalities, using vaccines as their through-running example. They illustrate their approach by applying it in a study of binding mandates for 100-percent-effective vaccines and show how it can be used to depict a striking (known) result that, compared to laissez-faire, such a mandate will always lower social welfare. They also discuss important real-world caveats to this result.