Why the flu vaccine creates a market failure that requires government intervention

Vaccines provide benefits to people beyond the individual who receives them, creating positive externalities. This video explains why this gap between private and social value leads to an undersupply of flu shots and how a subsidy can correct the market.

When an individual chooses to get a flu vaccine, they incur the full cost of the procedure while capturing only a portion of the total benefit. Because the vaccine prevents the spread of illness, the social value of the shot exceeds the private value to the individual. This discrepancy results in a market failure where fewer people get vaccinated than is socially optimal.

To address this undersupply, economists propose a Pigouvian subsidy. By subsidizing goods that generate positive externalities, the government can align private incentives with social benefits, encouraging higher uptake of vaccines and improving overall public health outcomes.

Source: External Benefits