External benefits, MPB and MSB, why merit goods such as vaccinations are under-consumed, the welfare loss, and subsidies and state provision. Through measles.
Measles is one of the most contagious diseases there is, and two doses of the MMR vaccine protect against it. As vaccination rates fell below the 95% needed to stop outbreaks, cases returned: England recorded 2,911 laboratory-confirmed cases in 2024, the highest yearly total for over a decade.
The vaccine is free, so why don’t more parents choose it? And how does one family’s choice affect everyone else?
Source: UK Health Security Agency, Measles: historic confirmed cases (2025).
A positive externality is a benefit to a third party that is not reflected in the price. Vaccination protects others; education creates a more productive workforce; a well-kept garden pleases the neighbours.
Social benefit = private benefit + external benefit
MPB is the benefit to the consumer: the demand curve. MSB adds the external benefit, so it lies above MPB.
Assumptions: consumers act in their own interest and ignore the benefit to others; there are no external costs, so MPC = MSC. Goods like this, which people under-value, are often called merit goods: there may also be an information gap, as people underestimate the benefit to themselves.
You decide whether to get a flu jab.
It protects you, but it also makes it less likely you pass flu on to others.
When people decide for themselves, how many jabs are likely to be taken?
People weigh their own benefit against their own cost. The benefit to others is left out, so fewer people get vaccinated than would be best for society. That is under-consumption from a positive externality.
The free market: consumers buy where their private benefit equals the private cost, MPB = MPC, at Q1 and P1.
Each vaccination also protects others, so marginal social benefit, MSB, is above MPB. The vertical gap is the external benefit of each unit.
Check: Why does MSB lie above MPB?
MSB = MPB + external benefit. The gap is the benefit to others of each unit consumed.
The social optimum is where MSB = MSC, at Q*: to the right of Q1. The free market under-consumes: Q1 instead of Q*.
Every unit between Q1 and Q* is worth more to society than it costs, but is not consumed. That lost welfare is the triangle between MSB and MSC, from Q1 to Q*. Again it points towards the social optimum.
Check: For the units between Q1 and Q*, which is true?
Between Q1 and Q*, MSB is above the cost curve: each unit is worth more to society than it costs, but it is not consumed.
The government wants consumption to rise to Q*.
Check: What size of subsidy per unit moves consumption to the social optimum?
The gap between the benefit people act on and the benefit to society is the external benefit. A subsidy of that size closes the gap, so consumption rises to Q*, where MSB = MSC.
The fix: a subsidy equal to the external benefit. It shifts supply down by the subsidy, the price consumers pay falls to P2, and consumption rises to Q*. The government pays the subsidy on every unit: the cost is the rectangle. Making the good free at the point of use, as the NHS does with vaccines, goes further still.
A subsidy is not the only tool.
Check: An information campaign shows people the true benefit of vaccination. Which curve moves?
Once people see the true benefit, the benefit they act on rises, so MPB (demand) shifts right towards MSB and consumption rises.
Other tools: state provision (free schooling, free vaccines), regulation (compulsory schooling to 16, and education or training to 18 in England), and information campaigns, which shift MPB towards MSB by showing people the true benefit.
An external benefit is added to private benefit, so MSB lies above MPB, not below it. With MSB below MPB they have drawn a negative consumption externality.
Using a diagram, explain why vaccinations are likely to be under-consumed in a free market.
A positive externality is a benefit to third parties that is not reflected in the price. When someone is vaccinated, they also make it less likely that others catch the disease.
[Diagram: S = MPC = MSC, D = MPB, MSB above MPB. Q1 where MPB = MPC; Q* where MSB = MSC. Welfare loss between MSB and MSC from Q1 to Q*.]
Individuals decide whether to be vaccinated by weighing their own private benefit against their private cost, including time and travel. They ignore the benefit to others, so consumption is where MPB = MPC, at Q1. Because each vaccination also benefits third parties, the marginal social benefit is higher, and the social optimum is where MSB = MSC, at Q*.
As Q1 is less than Q*, vaccinations are under-consumed. The units between Q1 and Q* are worth more to society than they cost, so there is a welfare loss. People may also underestimate the private benefit, an information gap, which makes under-consumption worse.
However, the size of the welfare loss depends on how big the external benefit is, and that is hard to put a money value on. If the vaccine is already free, the barrier may be time, trust or misinformation rather than price, so a subsidy alone may not raise uptake to Q*.
Measles cases: UK Health Security Agency (2025). Diagrams drawn with Rough.js and perfect-freehand, both MIT licensed. Your answers are saved only on this device.