# Externalities | Economics homework help

Externalities

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.

 Quantity of Education (in years) Sian’s Marginal Benefit per year Sian’s Marginal Cost per year 9 – – 10 \$20,000 \$15,000 11 19,000 16,000 12 18,000 17,000 13 17,000 18,000 14 16,000 19,000 15 15,000 20,000 16 14,000 21,000 17 13,000 22,000

1. Find Sian’s market equilibrium number of years of education

1. 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

1.  What is the socially optimal number of years of education?

1. 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?  Justify your answer.

1. How high would you set this tax or subsidy per year of education? Justify your answer.

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