Give an example of a positive externality and suggest a policy instrument to address it.

• A. Vaccination; subsidies or public provision to increase consumption.
• B. Pollution; tax.
• C. Traffic congestion; road pricing to reduce use.
• D. Deforestation; tariffs.

Answer: (A)

Positive externalities happen when someone’s action creates benefits for others that the market doesn’t pay for. Vaccination is a textbook example because getting vaccinated lowers your own risk and also reduces the spread of disease to others, producing benefits for people who don’t pay for your protection. Since individuals weigh only their private costs and benefits, the market would underprovide vaccination relative to the social optimum. A policy that increases uptake—subsidies to vaccines or public provision of vaccination services—helps internalize this external benefit by making vaccination cheaper or free, encouraging more people to get vaccinated and boosting herd immunity.

The other options illustrate negative externalities or policies not aimed at promoting a positive spillover: pollution creates costs borne by others and is typically addressed with a tax; traffic congestion is a negative externality addressed by road pricing to reduce use; deforestation and tariffs do not target a positive externality.