Question

Table C (below) shows the schedules for marginal social cost, marginal private benefit, and marginal social benefit of a university education for each student.

1. Assuming a competitive free market for private university education (i.e. with no government involvement in university education), how many students are likely to enrol? 1 mark.
2. What is likely to be the university fee per student? 1 mark.
3. What is the socially efficient enrollment level? 1 mark.
4. What is the marginal external benefit per student at the socially efficient enrollment level? 1 mark.
5. If the government subsidises universities so that thesocially efficient number of students will enrol, what is the amount paid by taxpayers? 1 mark.

Table C

Students (millions)	MSC (per student)	MB (per student)	MSB (per student)
1	$       3,000	$6,000	$9,000
2	$       3,000	$5,000	$7,500
3	$       3,000	$4,000	$6,000
4	$       3,000	$3,000	$4,500
5	$       3,000	$2,000	$3,000
6	$       3,000	$1,000	$1,500

Answer 1

The table is given as follows:

Students (millions)	MSC (per student)	MPB (per student)	MSB (per student)
1	$3,000	$6,000	$9,000
2	$3,000	$5,000	$7,500
3	$3,000	$4,000	$6,000
4	$3,000	$3,000	$4,500
5	$3,000	$2,000	$3,000
6	$3,000	$1,000	$1,500

---

a) In a private competitive market, only the private benefits and private costs will be considered.

MSC = MPB at the level of 4 million students, which is the private equilibrium

---

b) At this private outcome, the fee per student is the MSC, which is $3,000 per student.

---

c) The socially optimal level is where MSC = MSB, i.e., social costs are equal to social benefits.

This is at the level of 5 million students, which is the social equilibrium.

---

d) The marginal external benefit is the difference between MSB and MPB, i.e.,

3000 - 2000 = $1000 per student

---

e) At the socially optimal level, 5 million students are enrolled. For each student, an external benefit of $1000 is associated. Thus the total tax required is:

5 million students x $1000 = $5 billion in taxes