Question

28. Explain, using appropriate diagram(s), why state interference may be necessary to ensure that the socially optimum level of education is reached Identify social benefits that accrue to the economy as a whole as the result of those many individual decisions to accumulate more human capital Further identify the appropriate level of schooling that needs to be publicly funded in developing world and use an appropriate diagram to substantiate your answer. Also explain under what circumstances the publicly funded education system can promote the rise of inequality in society.

Answer 1

Goods can be divided into various categories:

1) Private goods

2) Pure public goods

3) Club Goods

4) Common resources

5) Quasi-public good/ Impure public good/ merit good

Education is an example of a quasi-public good. There will always be a private demand forthcoming from the market due to the private benefits that one derives from education ( more education leads to higher-paying jobs which in turn increases the purchasing power of the individual). Moreover, there are some social benefits of education as well. An educated public leads to a highly skilled labour force and increases the GDP of the economy. Therefore, government intervention in the provision of such merit goods is necessary for a developing economy.

Apart from private demand, there will also be a social demand for education. The optimal provision of education can be derived using the following graph. Here,

DD': Private demand

SS': Social Demand

MSB: Marginal Social Benefit (vertical summation of the private demand and social demand)

MSC: Marginal social cost of providing education

q_p: Quantity demanded by considering only the private demand and cost of provision

q^*: Equilibrium quantity considering both the private and the social demand and costs of provision of education

MSB. MSC.