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The marginal cost of educating a college student online is $ 3,000 a year
The marginal cost of educating a college student online is $ 3,000 a year. The marginal external benefit from a college education is 50 percent of the marginal private benefit.
If the government subsidized colleges and sets the subsidy so that the efficient number of students enroll. many million students would enroll and what would the subsidy per student be?
Expert Solution
In presence of positive externality, marginal social benefit (MSB) is greater than marginal private benefit (MR) or marginal revenue.
MSB = MEB + MR
=> MSB = 0.5MR + MR
=> MSB = 1.5MR
Condition for optimal solution for the society as a whole is MSB = MC.
1.5MR = 3000
=> MR = $2000
MEB = 0.5 * 2000 = $1000
Government will provide subsidy equal to the marginal external cost, that is at $1000 per student.
Number of students who will enroll will be determined with respect to the equilibrium point. Equilibrium point is the point of intersection between MSB and MC curve.
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