Question

Government’s financial contributions to higher education will benefit society as a whole and not just the individuals receiving support. Critically evaluate this statement by explaining, using a diagram and its description, whether government should intervene when a positive consumption externality occurs. Can a (Pigouvian) subsidy imposed by government promote allocative efficiency?

Answer 1

Answer:

a. Yes, the society as a whole will benefit from individuals getting higher education. Society will be more civilized, discerning and intelligent. In the long run, the society will make technological progress and economic growth will be faster. So, it is only right that the government of a country should intervene and increase the consumption of this positive externality.

  

Price MC P1 P SMB PMB Q Q1 Quantity of education

b. As we see in the graph, social marginal benefit is greater than private marginal benefit. So, the society should produce Q1 level of higher eduction which is more than the individual consumption level of Q.

c. Yes, a Pigouvian subsidy provided by government will help in enhancing the consumption of this positive exernality. Subsidy will encourage more individuals to take up higher education and it will thereby promote alloctive efficiency.