Education confers several benefits on society, including more technological inno

Question

Education confers several benefits on society, including more technological innovation and a more informed electorate. Therefore, the market quantity of education is not equal to the efficient quantity. The following graph shows the demand for education (its marginal private benefit), the supply of education (the marginal private cost of producing it), and the marginal social benefit of education (including both private benefits and external benefits). On the graph, use the black point (X symbol) to indicate the market quantity. Next, use the purple point (diamond symbol) to indicate the efficient quantity. (Hint: Place the points at the appropriate equilibria. Drop lines will extend to reveal the quantities.) PRICE OF EDUCATION Market Quantity Supply MPC,MSC) Efficient Outcome MSB Demand MPB MPB QUANTITY OF EDUCATION nneaman QUANTITY OF EDUCATION Help Clear All -

Explanation / Answer

If subsidy is offered equal to the price at the efficient outcome, then the government may suffer fiscal deficit, the economy would also face crowding out effect and other sectors would suffer. So, this could not be a correct option.

If subsidy is offered to consumers equal to the vertical distance between the marginal private benefit curve and marginal social benefit curve, it would subsidise the behaviour of consumers. But in order to achieve efficient outcome, the government should offer a subsidy to producers equal to the vertical distance between the marginal private benefit curve and marginal social benefit curve. This would expand education more so that the market would promote but without raising the final price to consumers. So, the correct option is C.

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