Question

Graph the market failure of Higher Education

Answer 1

Ans. Higher education has positive externalities on the society because it increases the productivity of the person increasing overall output in the economy. So, marginal social benefit (MSB) of higher education is more than the marginal private benefit (MPB) of the higher education which can be be a high paying job. So, equilibrium quantity of higher education is calculated where marginal private benefit equals marginal cost (MC) of getting higher education. So, the equilibrium value is less than the social optimal level because marginal social benefit is not taken into account while calculating the equilibrium. So, it creates a market failure in the economy where socially optimal level of highet education is Qe but equilibrium level of higher education is Q. Government can improve this output by giving a subsidy on acquisition of higher education which will decrease the marginal cost shifting the MC curve downwards to MC'. This will lead to an equilibrium level of higher education equal to socially optimal level, Q.

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