Question

Earning a college degree has some well-known and well-documented advantageous impacts on an individual. That is the motivation for people to delay their entry into the workforce for four or five years while they earn a baccalaureate degree. However, studies have shown significant positive impacts on the community, the state, and society caused by higher education. For example, states with more college-educated people also display better health conditions, higher earnings, lower crime, more innovation, and a general increased standard of living. In the language of our current module, higher education is a positive externality. The person deciding to attend college is doing it for the benefits she will receive from this new knowledge and experience. However, it is also true that there will be positive spillover effects on her community and state.

Question 1

In the lecture videos, we discovered that when an activity also produces a positive externality, the marginal social benefit (MSB) from that activity was different than the marginal private benefit (MPB) curve (the MPB is also known as our demand curve). State what this difference is and explain the reason for that difference.

We also discovered that the socially optimal level of this activity would be systematically different than what the market would produce. Explain that difference.

Question 2

Let’s continue probing this discussion of higher education as a positive externality. Given that the market outcome is different than the socially optimal outcome, there could be an opportunity for governments to intervene in a corrective matter.

Suggest two possible actions by the government that could push the outcome closer to the socially optimal level. Explain.

If we did choose one or both of these options, policy makers would need to make some hard decisions about budget allocation. Given the value of higher education, why is this a “hard decision?”

Answer 1