Question

It is said that some goods such as education (with positive externalities), if left to private decisions, are not produced enough from the society’s point of view. Comment and support your answer graphically. How could the socially acceptable quantity be achieved? Please answer it by using the concepts from Microeconomics.

Answer 1

Answer

True, some goods like education, if left to private decisions, are not produced enough from the society’s point of view. When you consume education you get a private benefit. But there are also benefits to the rest of society. E.g you are able to educate other people and therefore they benefit as a result of your education. (positive consumption externality).

In the above graph, we can clearly see how there an external benefit that exist. However, the equilibrium reached by the market forces does not tap/capture this external benefit.

To correct a positive externality, such as education, society can subsidized the consumer, increasing the demand for the good. Grants and other subsidized school loans increase consumer's demand for education. Alternatively, a subsidy may be given to the producer to reduce the marginal cost of providing the good.