Question

Suppose a positive externality is associated with large enrollment. Assume that college instruction is sold in a competitive market and that the marginal social cost of providing it increases with enrollment. Show how a corrective subsidy to college students will increase the market price of instruction. Show the net gain in well-,being possible from the subsidy and the amount of tax revenue required to finance its costs on your graph.
please show your work and graph

Answer 1

The initial market equilibrium occurs at point Z with equilibrium price level P and quantity X. When the government provides a corrective subsidy level of PP₁ per college student, the demand for the college instructions increase shifting the demand curve from D to D'. Consequently the new equilibrium level is established at point A. At A, the market price increases to P₁ since marginal cost function is given as increasing with more enrollment.

Although the net price paid by consumers after receiving the subsidy falls to P₂, thus, increasing the quantity demanded to the level x₁. The amount of revenue required by the government to finance the costs of providing subsidy is P₁P₂AB.

The producer surplus increases by PP₁AZ and the consumer surplus increases by PP₂ZB. Thus, area ZAB is the associated dead weight loss.

Price, Benefit cost ($) and S=MC College Instructions cqty). Csated with CamScanner