Question

1-Suppose the marginal social cost of fighter aircraft each year exceeds their marginal social benefit Are fighter aircraft being produced at an efficient level?

2-The marginal social benefit of college enrollments currently exceeds its marginal social cost . Use a graph to demonstrate the gain in efficiency that would result from an increase in college enrollment.

Answer 1

Part (1)

if the marginal social cost (MSC) of fighter aircraft each year exceeds their marginal social benefit (MSB), the fighter aircraft are not being produced at an efficient level.

For production at efficient level, MSB = MSC.

Further, at a production level where MSB = MSC; the Gains = Total Social benefits - total social costs, are maximised.

If production of aircraft is at a point where, MSC > MSB, we are eroding the gains available to the society. Because every production at this point will lead to more social costs than the social benefits. Hence, production needs to be reduced to a point where MSB = MSC such that gains to the society is maximised.

Part (2)

If, the marginal social benefit (MSB) of college enrollments currently exceeds its marginal social cost (MSC) , the system is not efficient. The marginal condition for efficiency is not met. The college enrollment needs to be increased to come to a point where MSB = MSC. At this point the net gains will be maximized.

Please see the graph below that demonstrates the gain in efficiency that would result from an increase in college enrollment.

The upper graph is depiction of MSB and MSC

The lower graph is depiction of Total Social benefit (TSB) and Total Social Cost (TSC)

Slope of TSB curve is MSB line and slope of TSC curve is MSC line.

We are currently operating at point Q1 in the first graph. At Q1, MSB represented by point B is higher than MSC represented by point A. Corresponding to the point Q1, please see the lower graph. The line Ab in the lower graph tells us the magnitude of gains = TSB - TSC.

The length of line AB can be improved further and maximised.

Let's say we increase the number of enrollments in the college. This means we start moving on the right hand side of the point Q1. As we move right of Q1, we see MSB reducing and MSC increasing. Eventually the length of line AB in the lower graph increases. As we continue to move further, we eventually hit a point represented by E in the upper graph corresponding to efficiency number of enrollment, Q_E. At this point MSB = MSC. The curves representing TSB and TSC are nearly parallel and the length of the line A'B' that represents the TSB - TSC = net gains is maximised.

Thus, by increasing the enrollments at the college till the value Q_E, as depicted by this graph, demonstrates the resultant gain in efficiency.