Question

Explain and illustrate why education in free market without government intervention is likely to be under-produced and how this market failure can be corrected.

Answer 1

Education has positive externalities, Thus, there is diversion between private effects and social effects.

Social Marginal Benefit = Private Marginal benefit + Positive External Benefit.

thus,while deciding level of education, private sector considers only private marginal benefit. Positive external benefits are not considered while deciding level of education. Thus, there is underproduction of education. Private sector provides inefficient level of education.

Market fails to deliver efficient result here. Government intervention is required to increase level of education here. Only government intervention in form of subsidy can correct such market failure.