Question

Q2: The market for post-secondary education is represented by Q = 3900 – 2P and Q = 4P – 600 where Q is the number of seats in post-secondary courses and P is the price of a post-secondary course.

Hint: Figure 5.6 on page 109 of your textbook or Chapter 5 – Graph 9 (Positive Externalities) found in Brightspace is useful for visualizing the market for post-secondary education.

a) What are the free market equilibrium price and equilibrium quantity of post-secondary education?

b) The consumption of post-secondary courses creates positive externalities. Give and explain two (and only two) specific and distinct externalities associated with the consumption of post-secondary courses You might need to do some research to answer this question.

Warning: Be precise. Do not include anything in your answer that does not pertain to a positive externality arising from the consumption of post-secondary education.

c) Due to the positive externalities associated with the consumption of post-secondary courses, the full social value demand for post-secondary education is represented by Q = 5910 – 3P. What are the socially optimal equilibrium price and equilibrium quantity of post-secondary courses?

Hint: This question is not as straight-forward as it appears. Where is P* in the graph showing a market with positive externalities?

d) Why is the free market for post-secondary education inefficient? Explain in such a way that a layperson who does not know anything about economics would understand. In other words, DO NOT use terms such as total economic surplus and deadweight loss in your answer because a layperson would not know what they mean.

e) What does the deadweight loss in the free market for post-secondary education equal? Show clearly how you arrived at your answer.

f) What is one (and only one) government intervention that would make the free market for post-secondary education more efficient AND what impact does this government intervention have on the market?

Answer 1

a)

Demand : Q = 3900 - 2P

Supply : Q = 4P - 600

For equillibrium

3900 - 2P = 4P - 600

P = 4500/6 = 750

Q = 3900 - 2*750 = 2400

b)

Positive externality : External benefit which will increase demand

example can be

1. greater financial and employment security

2. more opportunities to connect with, and contribute to community

c)

Demand : Q = 5910 - 3P

Supply : Q = 4P - 600

At new equillibrium

5910 - 3P = 4P - 600

P = 6510/7 = 930

Q = 5910 - 3*930 = 3120

d)

In free market, the suppliers would create a shortage of seats, this will decrease supply.

A decrease in supply will increase price. This will be good for suppliers i.e. colleges as they will earn more profit. This will not be good for people, as this will be disincentive for people to pursue post secondary education.

e)

Suppose, the supply is reduced to previous equillibrium supply as in part a.

Say, Q = 2400

For this Q, Prices will be higher as shown below

New Price will be according to equation,

Demand : Q = 5910 - 3P

P = (5910 - Q)/3 = 1170. (for Q = 2400)

The shaded area is dead weight loss i.e. loss to soceity because of underproduction.

Area of triangle is value of the dead weight loss

= 1/2* base* height = 1/2*(3120-2400)*(1170-930) = 86400

f)

Price ceiling will help protect the interests of consumers.