Question

Consider the education market of a country where the demand equation for education is given by P = 14 - 1⁄2Q and the supply equation of education is given by P = 2 + Q, where P is the price measured in thousand dollars and Q is the quantity of students measured in millions of students.

1. If there is no government involvement and the education market is competitive, determine the equilibrium student enrollment and price of education. Use an education market diagram to explain your answers

2. If education is able to generate positive externality, is the equilibrium quantity in answer in (a) efficient? Discuss

Answer 1

In equilibrium, demand equals supply.

14 - (Q/2) = 2 + Q

3Q/2 = 12

Q = 8

P = 2 + 8 = 10

From demand function, when Q = 0, P = 14 (vertical intercept) & when P = 0, Q = 28 (horizontal intercept).

From supply function, when Q = 0, P = 2 (vertical intercept).

In following graph, D0 and S0 are demand and supply curves intersecting at point A with equilibrium price P0 (= 10) and quantity Q0 (= 8).

If education produces positive externality, social benefit curve lies to the right of private demand curve, and socially efficient outcome leads to a price that is higher than private equilibrium price and a quantity that is higher than private equilibrium quantity.