Question

AutoSave C 9 Unit test 3 Word Search A Lovcloen kaur khahra LK File Home Insert Draw Design Layout References Mailings Review View Help Share Comments AaBbcc AaBbccc Aabba AaBbcc AaB AaBb CcD AqBbc Calibri (Headings - 11 A A A A BIUX, * A-D-A- + 2 T EEEEE Peste Nommal 1 No Spac... Heading 1 Heading 2 Title Subtitle Subtle Em. Dictate Find Replace Select Editing Copy Format Painter Cupboard Sensitivity Editor Font Paragraph Styles Voice Sensity Editor ..1.. Problem 1: Extemalities (20 points) Figure 1 shows the marginal private benefit fram college education at an imaginary college. The marginal cost of a college education in this example is a constant $6,000 per year. The marginal external benefit from a college education is $4,000 per student per year. FIGURE 1 $10,000 59,00 5000 $7,000 PRICE OF TUITION 33 $3,000 $2.500 3.000 1,500 2.000 4 DG 4,500,000 2,500 3.000 3,500 STUDENTS PER YEAR a) If colleges were private and government had no involvement in college education, how many people will undertake a college education, and what will be the tuition? by What is the efficient number of students? c) Explain why positive externalities lead to inefficient underproduction and how public provision, subsidies vouchers and patents can achieve a more efficient outcome. Page 2 of 5 DF E TA 899 558 word: English (United States) Type here to search O ! e ENG US 1:12 PM 7/29/2020

Answer 1

(a)

Private and Unregulated market equilibrium occurs when MPB = MC = 6,000.

Private number of students = 3,000

Private Tuition fee = $6,000

(b)

Socially efficient outcome is obtained when MSB = MPB + MEC = MSC = MPB + 4,000 = MC

In the graph below, socially efficient outcome is at of intersection between MSC and MC curves, with efficient number of students 5,000 and efficient tuition fee of $6,000.

FIGURE 1 $10,000 $9,000 MSB $8,000 57,000 MC PRICE OF TUITION $6,000 55.000 $4,000 MPB 53,000 $2.000 1.000 1.500 2,000 2.500 3.000 3,500 STUDENTS PER YEAR 4,000 4.500 5,000

(c)

Education is a source of positive externality. If the market doesn't internalize this external benefit, the market players keep setting a lower-than-efficient tuition fee and admitting a lower-than-efficient number of students. But if the government provides a consumption subsidy, it increases student enrolment, increasing demand until socially efficient outcome is obtained.