Question

Economics of Poverty - Human Capital

Explain how education can act as a signal for ability. What are separating and pooling equilibria in this context. Explain why a separating equilibrium is required for education to act as a signal for ability. What condition has to hold for a separating equilibrium to exist? Assuming that firms only reward higher education because it acts as a signal for ability, evaluate the social welfare effects of a program that subsidizes the cost of education for people who seem likely to do poorly in the labor market without any intervention (apparently low ability individuals)? (max. 600 words)

Answer 1

                                      Education in an economic concept is always regarded as the signal for the ability of an individual. It is the opportunity cost that is being regarded with the addition of education that defines the ability of an individual in an economy and in this regard, It can be seen that the attainment of education would raise the standards of an individual in an economy and hence would help the individual to earn better and contribute better to the economy for the attainment of education plays a key role in the attainment of jobs and the earning of an individual.

                                               

                                      In the above context of a game, we can specifically define the separating and pooling equilibria. A separating equilibria states that the players always have a different game plan or a differentiated response and a pooling equilibria defines that the players or individuals have a same response. In the context of education and ability, we can see that the attainment of basic education defines the pooling equilibria where the individuals have the same attainment and it is where the individuals choose their option to move forward that the separating equilibria could be defined. In this case, the response of each individual would be different and hence the differentiated response would define the final outcome of the ability of an individual. Thus, it can be seen that a separating equilibrium is required as it defines the ability of an individual in a society as the differentiated response of the individual would determine the course of action of the individual in an economy and hence would finally determine the contributing capacity of the individual and hence the ability.

                                      A separating equilibrium always works on the fact that the sane sender or individual always accommodates which differentiates itself from a crazy individual whose differentiated response would determine the ability. Thus, it can be seen that if there is accommodation, then the individual is sane or else it defines a crazy individual. In the given context, it is said that the social welfare measures subsidises the cost of education who seems to do poorly in the absence of an intervention. In this regard, it can be seen that the ability of the individual is lifted. As it is said that the response of the individual would be poor without intervention, the introduction of social welfare measures would ensure that the individual would get the right opportunity to respond and the differentiated response of that individual would determine the final ability of them to specific outputs. As social welfare measures are adopted, then the response would be more oriented towards defined and desired outcomes and hence the individual would get the desired response measure for the same.