Figure 4-24
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 4-24.
-Refer to Figure 4-24.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 4-24
  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 4-24.
-Refer to Figure 4-24.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) of education at the economically efficient quantity. In the graph, the economically efficient quantity is where the marginal social benefit (MSB) equals the marginal private cost (MPC), which is Q₂. At this quantity, the MSB is equal to P₂ and the MPC is equal to P₁. Therefore, the per-student Pigovian subsidy that the government must provide is P₂ - P₁. Hence, the correct answer is B.

Figure 4-24 College Education Benefits Society by Producing a More