Questions: A college education creates positive externalities. Use the accompanying graph which represents the hypothetical market for a college education in the land of Smartypants to answer the questions that follow. MSB stands for marginal social benefit, MPB stands for marginal private benefit, and MPC stands for marginal private cost. 1. Move point E to the efficient equilibrium outcome. 2. If the government of Smartypants wanted to subsidize college education, how much would it subsidize each student to achieve the socially optimal level of education?

A college education creates positive externalities. Use the accompanying graph which represents the hypothetical market for a college education in the land of Smartypants to answer the questions that follow. MSB stands for marginal social benefit, MPB stands for marginal private benefit, and MPC stands for marginal private cost.

1. Move point E to the efficient equilibrium outcome.
2. If the government of Smartypants wanted to subsidize college education, how much would it subsidize each student to achieve the socially optimal level of education?

Transcript text: A college education creates positive externalities. Use the accompanying graph which represents the hypothetical market for a college education in the land of Smartypants to answer the questions that follow. MSB stands for marginal social benefit, MPB stands for marginal private benefit, and MPC stands for marginal private cost. 1. Move point E to the efficient equilibrium outcome. 2. If the government of Smartypants wanted to subsidize college education, how much would it subsidize each student to achieve the socially optimal level of education? $ $\square$

Solution

Solution Steps

Step 1: Locate the Socially Optimal Equilibrium

The socially optimal equilibrium is where Marginal Social Benefit (MSB) intersects with Marginal Private Cost (MPC). On the graph, this occurs where the quantity of students is 90,000, and the price is $60,000.

Step 2: Locate the Private Market Equilibrium

The private market equilibrium is where Marginal Private Benefit (MPB) intersects with Marginal Private Cost (MPC). On the graph, this is denoted by point E, where the quantity of students is 40,000, and the price is $40,000.

Step 3: Calculate the Optimal Subsidy

To incentivize the socially optimal number of students (90,000), the government needs to subsidize the difference between the MSB and MPB at that quantity. At 90,000 students, the MSB is $60,000, while the MPB is $20,000. The difference is $60,000 - $20,000 = $40,000.

Final Answer:

The optimal subsidy is $40,000 per student.

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