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

Pigouvian subsidy refers to the subsidy that is used to encourage positive externality.
Positive externality enhances society as a whole.
Government’s financial contributions to higher education will benefit society as a whole and not just the individuals receiving support. Pigouvian subsidy imposed by government promote allocative efficiency. If government invest more in education, it will benefit to the whole society.
Piguvian subsidies causes increase in consumption and output to a more socially efficient level.
Piguvian subsidy shifts the supply curve to right and it leads to a lower market price and higher quantity demanded.

Si 7 Pigouvian subsidy S2 30 20 Subsidy 8 D 100 120 X