Question Briefly explain why education confers positive externality. Depict the market for education where social benefit...

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.

Expert Solution

If one person gets education, the benefits of education has a spillover effect on her immediately family, neighborhood and the society by way of increased human capital, higher social awareness and environmental sustainability, for which the other beneficiaries don't need to pay. Therefore, education is a positive externality.

The positive externality gives rise to an external benefit in consumption, which shifts demand (private marginal benefit, PMB) rightward by amount of external benefit to social marginal benefit (SMB). In following graph, equilibrium is at point A where PMB intersects PMC with price P0 and quantity Q0. Efficient outcome is at point B where SMB intersects PMC with higher price P1 and higher quantity Q1. Deadweight loss from non-internalization of the externality is area of triangle ABC. Government can ensure social efficiency by offering consumption subsidy of BD per unit.

Rahul Sunny answered 7 months ago

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