Question

Briefly explain why education confers positive externality. Depict the market for education where social benefit exceeds private benefit. Explicitly show the equilibrium and socially optimal quantities.

Answer 1

The Market for Education

In the market for education, there are education providers, there are education receivers, and there is society (or third parties).

Education providers are schools, colleges etc. They are the sellers.

Education receivers are the students. They are the buyers.

The third parties include various aspects of society, apart from the buyers and sellers. This may include anyone from neighbors to recruiters, who will be affected by the process of education.

Education confers a positive externality on third parties. This is because better educated students will become better citizens. They will be better spouses, better voters, better employees etc. Every role that they will play, will be out of wisdom.

Now in such markets, it is essential to motivate buyers and sellers to participate more. That is why education is subsidized in many countries.

The given diagram depicts this information.

Here, it is shown that demand from students should be increased to the socially beneficial level. Another similar strategy is to increase the supply from educational institutes.

The market equilibrium, in case of a private market, is lower than the socially optimal level. A private market is where the government hasn't provided any subsidy.

The difference between private benefit and social benefit, is known as external benefit.

This external benefit to society (third parties) can only be achieved by increasing the quantity of the good or service (in this case, it is Education).