Education is an example of a positive externality: acquiring more education benefits the individual student and having a more highly educated work force is good for the economy as a whole.
The accompanying table illustrates the marginal benefit to Sian per year of education and the marginal cost per year of education. Each year of education has a marginal external benefit to society equal to $8,000. Assume that the marginal social cost is the same as the marginal cost paid by an individual student.
|
Quantity of Education
(in years)
|
Sian's Marginal Benefit
per year
|
Sian's Marginal Cost
per year
|
|
9
|
-
|
-
|
|
10
|
$20,000
|
$15,000
|
|
11
|
19,000
|
16,000
|
|
12
|
18,000
|
17,000
|
|
13
|
17,000
|
18,000
|
|
14
|
16,000
|
19,000
|
|
15
|
15,000
|
20,000
|
|
16
|
14,000
|
21,000
|
|
17
|
13,000
|
22,000
|
- Find Sian's market equilibrium number of years of education
- Calculate the marginal social benefit schedule
|
Years of Education
|
Sian's marginal benefit per year
|
Marginal external benefit to society
|
Marginal social benefit
|
Sian's marginal cost per year
|
|
9
|
-
|
-
|
-
|
-
|
|
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?
- You are in charge of education funding. Would you use a Pigouvian tax or a Pigouvian subsidy to induce Sian to choose the socially optimal amount of education? Justify your answer.
- How high would you set this tax or subsidy per year of education? Justify your answer.