Question

 

Table C (below) shows the schedules for marginal social cost, marginal private benefit, and marginal social benefit of a university education for each student.

1. Assuming a competitive free market for private university education (i.e. with no government involvement in university education), how many students are likely to enrol? 1 mark.
2. What is likely to be the university fee per student? 1 mark.
3. What is the socially efficient enrollment level? 1 mark.
4. What is the marginal external benefit per student at the socially efficient enrollment level? 1 mark.
5. If the government subsidises universities so that thesocially efficient number of students will enrol, what is the amount paid by taxpayers? 1 mark.

Table C

Students (millions)	MSC (per student)	MB (per student)	MSB (per student)
1	$ 3,000	$6,000	$9,000
2	$       3,000	$5,000	$7,500
3	$       3,000	$4,000	$6,000
4	$       3,000	$3,000	$4,500
5	$       3,000	$2,000	$3,000
6	$       3,000	$1,000	$1,500

 

 

Answer 1

A) Assuming a free market environment, the number of students likely to be enrolled will be when the Marginal cost becomes equal to the Marginal private benefit of the students

We can see from the table that it is at the point Students = 4 millions (Where both MSC and MPB are 3000$)

Thus 4 million students are likely to be enrolled

b) The university fee per student is likely to be 3000$ as it is also the Marginal private benefit of the student at this level of enrollment.

C) The socially efficient enrollment level will be at the point when the Marginal social cost equals the Marginal social benefit

We can see from the table that this happens at the point when number of students = 5 million (Both MSC and MSB are 3000$)

Thus 5 million is the socially efficient enrollment level.

D) The marginal external benefit per student at the socially efficient enrollment level will be MSB-MPB or the Difference between the Marginal social benefit and the Marginal private benefit of the student

At the socially efficient even of 5 million, we can see that MSB= 3000$ and MPB = 2000$

Therefore the marginal external benefit per student = 1000$

E) At this level of enrollment, the Marginal private benefit and thus the fees paid by the students will be 2000$, since the Marginal cost is still 3000$, 1000$ of subsidy will have to be provided by the government for each student.

Total amount paid in the subsidy is therefore 1000$*5 million = 5,000,000,000$ = 5 billion$

Therefore 5 billion$ will have to be paid by taxpayers due to the government subsidies at the socially efficient level of output.