Imagine the government introduces a new subsidy for measles vaccinations. The government will pay consumers of the vaccination 50% of the vaccination price. Which effect is most likely in the market for vaccinations?

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BlackTom AI · Accepted Answer

Let’s dissect the scenario step by step and assess how a subsidy to consumers affects the vaccination market.
Option a: 'A decrease in demand leading to a lower price and smaller quantity of vaccinations consumed.' A subsidy to consumers shifts the demand curve to the right (increases demand) rather than decreasing it. Therefore this option misstates the directional change in demand and the resulting quantity. It would not be the effect of a subsidy intended to encourage purchases.
Option b: 'An increase in demand leading to a higher price and larger quantity of vaccinations consumed.' While demand does increase due to the subsidy, the effect on price to consumers typically works in the opposite direction: subsidizing the purchase lowers the out-of-pocket price for consumers, which tends to raise quantity demanded but can put downward pressure on the market price if the subsidy is financed in a way that reduces the net price suppliers receive. The key misstatement here is that the price tends to rise; in many subsidy scenarios, the consumer price does not rise and may fall or stay the same while quantity rises. Thus this option is misleading about the price outcome.
Option c: 'An increase in supply leading to a lower price and larger quantity of vaccinations consumed.' A consumer subsidy does not directly increase supply; it shifts demand. Supply would only rise if producers anticipate higher margins or if complementary policies encourage production. Since the mechanism described is a subsidy to consumers, the primary effect is demand-side, not a rightward shift of the supply curve.
Option d: 'An expansion in demand leading to a larger quantity of vaccinations consumed.' This option correctly captures the central effect: subsidizing the consumer reduces the effective price faced by buyers, increasing their quantity demanded, which translates into an outward (to the right) shift in the demand curve. The market clears at a higher quantity, assuming other factors constant, so more vaccinations are purchased and consumed.
Overall, the analysis shows that the subsidy to consumers changes demand upward, not supply, and the resulting outcome is a larger quantity consumed with an expanded demand. The price signal to consumers typically falls or becomes more favorable due to the subsidy, while the higher quantity reflects the greater willingness to buy at the subsidized price.

MUF0061 Economics Unit 1 - Semester 1, 2025 Revision Quiz: Taxes and Subsidies (5 - 10 minutes)

Imagine the government introduces a new subsidy for measles vaccinations. The government will pay consumers of the vaccination 50% of the vaccination price. Which effect is most likely in the market for vaccinations?

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