Education is an example of a positive externality: acquiring moreeducation benefits the individual student and having a more highlyeducated work force is good for the economy as a whole.
The accompanying table illustrates the marginal benefit to Sian peryear of education and the marginal cost per year of education. Eachyear of education has a marginal external benefit to society equalto $8,000. Assume that the marginal social cost is the same as themarginal cost paid by an individual student.
a. Find Sian's market equilibrium number of years of education
b. Calculate the marginal social benefit schedule
Years of Education Sian's marginal benefit per year Marginalexternal benefit to society Marginal social benefit Sian's marginalcost per year
10 $20,000 $8,000 $15,000
11 19,000 8,000 16,000
12 18,000 8,000 17,000
13 17,000 8,000 18,000
14 16,000 8,000 19,000
15 15,000 8,000 20,000
16 14,000 8,000 21,000
17 13,000 8,000 22,000
What is the socially optimal number of years of education?
c. You are in charge of education funding. Would you use aPigouvian tax or a Pigouvian subsidy to induce Sian to choose thesocially optimal amount of education?
d. How high would you set this tax or subsidy per year of education?
Education is an example of a positive externality: acquiring moreeducation benefits the individual student and having a more highlyeducated work force is good for the economy as a whole.
The accompanying table illustrates the marginal benefit to Sian peryear of education and the marginal cost per year of education. Eachyear of education has a marginal external benefit to society equalto $8,000. Assume that the marginal social cost is the same as themarginal cost paid by an individual student.
a. Find Sian's market equilibrium number of years of education
b. Calculate the marginal social benefit schedule
Years of Education Sian's marginal benefit per year Marginalexternal benefit to society Marginal social benefit Sian's marginalcost per year
10 $20,000 $8,000 $15,000
11 19,000 8,000 16,000
12 18,000 8,000 17,000
13 17,000 8,000 18,000
14 16,000 8,000 19,000
15 15,000 8,000 20,000
16 14,000 8,000 21,000
17 13,000 8,000 22,000
What is the socially optimal number of years of education?
c. You are in charge of education funding. Would you use aPigouvian tax or a Pigouvian subsidy to induce Sian to choose thesocially optimal amount of education?
d. How high would you set this tax or subsidy per year of education?
