Question

Question 1
As a public good, education is one of the most important government functions in Bahrain and around the world. Because of external returns, market failures, or redistribution, governments have traditionally decided to be the majority providers of educational services. However, the optimal amount of government intervention in education markets depends on the extent of market failures in private provision of education and on the public returns to education.
Answer the following questions:
What are the sources of market failures in education that result in government intervention?
In Bahrain, as percentage of total public expenditures, how much the government allocate for education? Do you think this amount can be justified, given the importance of education in society? Explain.
How do you explain or justify private education in Bahrain? Ahlia offers educational services (private good). How do you compare private educational services (such as those provided by Ahlia) compared to public educational services (such as those provided by University of Bahrain), i.e. how does the demand for private education (private good) differ from that of public education (public good)?
Education produces positive externalities. How do you explain   

Question 2
The supply of paper is described by the following equation:
Qs = 5,000P
Where Qs is ton supplied per year and P is the price per ton. The demand is described by:
Qd = 400,000 - 1,000P
Where Qd is tons demanded per year. Because of the pollution associated with paper production, marginal external costs of $20 are associated with each ton of paper. Assuming that paper is sold in a competitive market:
What is the market price?
How many tons of paper will be produced per year at this price?
What is the efficient annual output of paper?
How can a corrective tax achieve efficiency?
Why do you think that market efficiency may not achieve social equilibrium in society?

Answer 1

Question 1)

In compensating for the failure of markets to supply public and merit goods, central and local government can intervene. In the case of pure public goods, such as defence and street lighting, the case for intervention is clear and unambiguous. However, in the case of merit goods and quasi public goods, there are disagreements about the precise role of government.

Most economists argue that governments have a crucial role in allocating resources to merit goods such as education and healthcare. Other economists prefer to highlight the failure of governments to allocate resources efficiently. These free-market economists argue that markets should be encouraged to work whenever possible, even in terms of the provision of merit goods.

In addition, or alternatively, a graduate tax can be justified to enable students to attend university at zero fees, or heavily discounted fees, while paying for the future benefit they will derive out of the income they gain from employment in the future.

The economic argument for government using coercion to fund — and even operate — a specific good or service is strongest for a good or service deemed to be a “public good.”

If schooling were indeed a public good, there would perhaps be a stronger economic argument for government funding and operation of schools. However, schooling easily fails both parts of the economic definition. If one student occupies a seat in a classroom, another child is prevented from sitting in the same seat. In addition, if students are added to a given classroom, the teacher is less able to tailor the educational approach to each child, which could reduce the average amount of personalized education received by each student. Because of this, schooling fails the nonrivalrous part of the definition. Second and perhaps most important, because it is not difficult to exclude a person from a school — or any other type of institution with walls — schooling fails the nonexcludability condition. If someone does not pay me to educate the student, I can simply deny the student services. Fortunately, schools will never suffer from a true free-rider problem because they are not true public goods. That is precisely why private schools and tutoring services operate effectively today without government operating or funding them.

Society benefits from a better-educated populace because individuals are more likely to interact with people who could teach them something new. In addition, better-educated citizens may produce high-quality goods and services that benefit the rest of society. For example, when a hard-working individual completes medical school, he or she benefits the rest of society by providing valuable services. The relevant positive externality can be thought of as the extent to which productive abilities are increased by the policy alternative.

A given educational setting can result in positive externalities if it results in a more cohesive society. An improved education could strengthen the character skills necessary to follow the law and tolerate the views of others. Furthermore, an educational setting can improve social cohesion through increasing racial diversity and integration.

Question 2)

marginal external cost associated with production of each unit is $20

Market equilibrium

socially efficient output

to achive social efficiency in the market, tax equaling the marginal external cost of $12 should be imposed

then price of paper increases from $ 66.67 to $ 83.34 and quantity of paper sold in the market falls from 333,350 tons to 316,666.67 tons