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1 October, 10:24

If education produces positive externalities, we would expect:

A. the government to tax education.

B. colleges to relax admission requirements.

C. people to realize the benefits, which would increase the demand for education.

D. the government to subsidize education.

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  1. 1 October, 10:34
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    D. Government to subsidize education

    Explanation:

    Externalities reflect benefit / harm to third party, without being reflected in price. These can be positive (beneficial) / negative (harmful), egs - wildlife sancturies and pollution respectively.

    Positive Externalities : Total Benefit to society > Private benefit to the person consuming [Total Benefit = Private Benefit + Social Benefit]. Negative Externalities : Total Cost to Society > Private Cost beared by person consuming [Total Cost = Private Cost + Social Cost]

    Positive externalities' extra social benefit & negative externalities' extra social cost are not reflected in their price. So, govt increases tax on negative externalities (to accomodate extra social cost) & subsidises positive externalities (to accomodate extra social benefit). This makes correction of underproduction of positive externalities & over production of negative externalities (based on private Benefit = Cost equalisation).

    Education is a positive externality because it doesn't only create benefit (private) for the person consuming, but also creates extra social awareness benefits. Hence, as per the above explanation : education being a positive externality, would be subsidized.
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