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 USING YOUR OWN WORDS. DO NOT PLAGIARIZE. 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

Q = 4P - 600

Q = 3,900 - 2P

a) At equilibrium, demand = supply

4P - 600 = 3,900 - 2P

6P = 4,500

P = 750

At this price, Q = 2,400

b) Positive externalities to society of post secondary courses:

• It raise literacy rate which raise the standard of living of society and helps society in achieving new heights.
• It reduces inequality because everyone gets the job and become the bread earners of their family.

c) Social benefit curve: Q = 5,900 - 3P

Socially optimal quantity occurs when 5,900 - 3P = 4P - 600

7P = 6,500

P = 928.57

At this price, Q = 3,114.28

d) Free market is inefficient because it tends to produce less than socially optimum outcome and leave resources unextracted or unexplored.

e) Deadweight loss is the area of portion A whose sum is (1/2) * (3,114.28 - 2,400) * (1,166.67 - 750) = 148,808.3

f) Government can provide subsidies to private producers such that they are induces to raise their production level till private demand curve touches social optimum level.