Question

Q4 (ch5). College education benefits society by producing a more employable workforce,

reducing crime and creating a better informed citizenry. Thus, the social benefits of college

education exceed the private benefits for each level of college education.

a. Illustrate with a diagram the effect of a positive externality in consumption on the market

for college education. Identify the market equilibrium price and quantity, the efficient

price and quantity, and the area of the deadweight loss.

b. Explain how a government can use a subsidy on college education to bring about the

efficient level of production. What should be the value of the subsidy?

Answer 1

Ans ):

Ans) In the above diagram,the MB curve is the private benefit curve which shows the benefit an individual receives from a good.The MC curve is the marginal cost curve.The intersection of MB curve and MC curve shows the equilibrium point in the market of education where the equilibrium price is equal to P and equilibrium quantity is equal to Q. At this equilibrium the producer does not take into the account the external benefit that education gives to the whole society.

In contrast, the blue line indicates the social marginal benefit curve which shows the benefit that whole society receives from a good.The intersection between the SMB and MC curve indicates the social optimum level of education.Thus, Q1 is the efficient level of output and P1 is the efficient level of price.

The green shaded region in the diagram represents the deadweight loss.

Ans b)

Subsidy is the amount that government gives to the producers for supplying more goods in the economy.

A per-unit subsidy can be introduced in which the government gives a specific fixed amount for each unit of good supplied.

As we can see in the diagram the per-unit amount of subsidy can be (P1 - P2).