Education is an example of a positive externality: acquiring more education benefits the individual student and having a more highly educated work force is good for the economy as a whole.
The accompanying table illustrates the marginal benefit to Sian per year of education and the marginal cost per year of education. Each year of education has a marginal external benefit to society equal to $8,000. Assume that the marginal social cost is the same as the marginal cost paid by an individual student.
a. Find Sian's market equilibrium number of years of education
b. Calculate the marginal social benefit schedule
Years of Education Sian's marginal benefit per year Marginal external benefit to society Marginal social benefit Sian's marginal cost per year
9 - - - -
10 $20,000 $8,000 $15,000
11 19,000 8,000 16,000
12 18,000 8,000 17,000
13 17,000 8,000 18,000
14 16,000 8,000 19,000
15 15,000 8,000 20,000
16 14,000 8,000 21,000
17 13,000 8,000 22,000
What is the socially optimal number of years of education?
c. You are in charge of education funding. Would you use a Pigouvian tax or a Pigouvian subsidy to induce Sian to choose the socially optimal amount of education?
How high would you set this tax or subsidy per year of education?