Most countries today have subsidised the provision of education. Consider an imaginary country, Gondolin. Gondolin pays a subsidy of $10 000 per year to each student enrolled in tertiary education. (a) Depict, with the help of a figure, the initial market for tertiary education in Gondolin, assume that: 1) education was left to the competitive free market; 2) the marginal private benefit is equal to the marginal social benefit; 3) the marginal private cost is equal to the marginal social cost. Now describe, using the help of the figure, the effect of the government subsidy on the price and quantity traded of tertiary education, where the X axis of the figure should be the quantity of students enrolled in tertiary education. You do not need to use actual numbers – focus on the direction of change in price and quantity traded caused by the subsidy.
Most countries today have subsidised the provision of education. Consider an
imaginary country, Gondolin. Gondolin pays a subsidy of $10 000 per year to each
student enrolled in tertiary education.
(a) Depict, with the help of a figure, the initial market for tertiary education in
Gondolin, assume that: 1) education was left to the competitive free market; 2)
the marginal private benefit is equal to the marginal social benefit; 3) the
marginal private cost is equal to the marginal
the help of the figure, the effect of the government subsidy on the price and
quantity traded of tertiary education, where the X axis of the figure should be
the quantity of students enrolled in tertiary education. You do not need to use
actual numbers – focus on the direction of change in price and quantity traded
caused by the subsidy.
(b) Identify the area of the figure you drew in (a) that depicts the total size of the
subsidy paid by the government to the students enrolled in tertiary education in
Gondolin. Who gains and who loses from such a subsidy?
(c) Subsidies lead to overproduction and overconsumption relative to the
competitive equilibrium. What is the
is there a deadweight loss? Depict this in your original figure from (a), or draw
a new figure.
(d) The original assumption for Gondolin stated that the marginal private benefit is
equal to the marginal social benefit. Now instead assume that the marginal
social benefit of tertiary education is greater than the marginal private benefit.
That is, assume there is a positive externality associated with having a tertiary
education. Draw this in a new figure. Is the deadweight loss from the subsidy
increased or decreased with the introduction of the positive externality? Why?
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