negative/positive; grant a subsity/impose a tax; greater than/ less than/ equal
ID: 1112337 • Letter: N
Question
negative/positive; grant a subsity/impose a tax; greater than/ less than/ equal to; spillover costs/spillover benefits; right/left
Some residents of a small town decide to go to college and get an education. Suppose the higher an individual's educational attainment, the ower the likelihood of that individual committing a crime. The following graph shows the demand (private value), the supply (private cost), and the social value resulting from the education The spillover effect associated with the decreased likelihood of crime would be classified as a externality. To achieve efficiency in the presence of such an externality, the government can , the amount of to residents for each year of education attained. Such a policy would shift the for education to the , resulting in a market equilibrium quantity that is closer to the socially optimal equilibrium quantityExplanation / Answer
For each blank, here is the explanation in a paragraph.
Spillover effects are basically activities that cause a seemingly unrelated impact on something. In this case, increase in education will reduce the likelihood of crime in the society. Hence this is a positive externality. Positive externality is a benefit enjoed by a third party not directly involved in an economic transaction. Here this spillover is good for the society and hence it is positve externality.
Efficiency will be achieved when the market demand curve is closer or becomes same as the social value curve. Hence the government to achieve efficiency in the presence of such externality, can grant a subsidy, equal to the amount of the spillover benefits to the residents for each year of education attained. This is because, a subsidy would motivate the people and incentivice them to pursue education. This subsidy should equal the spill over benefits. This should neither be less or more as it would lead to distortion in the market which means the demand curve will either move more than the social efficiency level or less than the level causing difficulty in achieving the socially optimum equilibrium. Also this should be spill over benefits and not cost as there is no cost involved here.
Such a policy would move the market demand curve for education to the right resulting in equilibrium quantity closer to the socially optimum level. This policy will move the demand curve for education because a subidy would make education very attractive for people and it is as good as comparing the impact of increase of income on demand curve.
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