Figure 5-12

College education benefits society by producing a more employable workforce, reducing crime, and creating a better informed citizenry. Thus, the marginal social benefits of college education exceed the marginal private benefits for any level of college education. This is illustrated in Figure 5-12.
-Refer to Figure 5-12.One way to obtain the economically efficient amount of college education is for governments to subsidize college education.What is the size of the per-student Pigovian subsidy that the government must provide to internalize the external benefits? (Note that the subsidy can be granted to the education institutions or to the students directly or indirectly; for example, through low-interest student loans.)

Question

Figure 5-12
  
College education benefits society by producing a more employable workforce, reducing crime, and creating a better informed citizenry. Thus, the marginal social benefits of college education exceed the marginal private benefits for any level of college education. This is illustrated in Figure 5-12.
-Refer to Figure 5-12.One way to obtain the economically efficient amount of college education is for governments to subsidize college education.What is the size of the per-student Pigovian subsidy that the government must provide to internalize the external benefits? (Note that the subsidy can be granted to the education institutions or to the students directly or indirectly; for example, through low-interest student loans.)

Quizplus · Accepted Answer

The size of the per-student Pigovian subsidy that the government must provide to internalize the external benefits is equal to the difference between the marginal social benefit (MSB) and the marginal private cost (MPC), which is equal to P₂-P₁. This subsidy can be granted to the education institutions or to the students directly or indirectly (e.g. through low-interest student loans). Option A is incorrect because it calculates the difference between the market price (P₂) and the initial price (P₀), which is not relevant for the calculation of the Pigovian subsidy. Option C is incorrect because it calculates the difference between the initial price (P₀) and the equilibrium price (P₁), which is not relevant for the calculation of the Pigovian subsidy. Option D is incorrect because it only gives the value of the equilibrium price (P₁), but it does not provide information on the size of the subsidy.

Figure 5-12 College Education Benefits Society by Producing a More Employable Workforce