Question

Figure 1 shows the marginal private benefit from 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 $9,000 SHOP $7,000 PRICE OF TUMON 56,000 $5,000 $4.000 $3.000 52,000 1.000 1.500 4,000 4,500 2,500 3.500 STUDENTS PER YEAR 5.000 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? I b) 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.

Answer 1

FIGURE 1 $30.000 59.000 58.000 57.000 PRICE OF TUITION > Marginal •Social 56.000 55.000 marginal Cost 54.000 $3.000 $2.000 1,000 marginal 5.000 Private 1.500 4.500 2.000 2.500 3.000 3.500 STUDENTS PER VAR Benefit 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? If colleges were private and government had no involvement in college education, then only 3000 students per year will undertake a college education and the tuition will be $6000. This is given by the intersection of the marginal private benefit curve and the marginal cost curve. What is the efficient number of students? The efficient number of students will be given by the intersection of the marginal cost curve and the marginal social benefit curve. According to the above given diagram, the efficient number of students is 5000 Explain why positive externalities lead to inefficient underproduction and how public provision, subsidies vouchers and patents can achieve a more efficient outcome. In the case of positive externalities, marginal external benefit is not taken into account by the producer, there is a tendency of underproduction of the good or service. Public provision, subsidies vouchers and patents can induce the producer to produce more of that good and service, thereby eliminating underproduction.