The accompanying table illustrates the marginal benefit to Sian per year of education and the marginal cost per year of education. Each year of education has a marginal external benefit to society equal to $8,000. Assume that the marginal social cost is the same as the marginal cost paid by an individual student.
Qty. Of Education (yrs)|Sian's Marginal Bene. Per Yr.|Sian's Margin. Cost Year
9
$20,000 ...........................| $15,000
10
19,000 .............................| 16,000
11
18,000 ..............................| 17,000
12
17,000 ..............................| 18,000
13
16,000 ..............................| 19,000
14
15,000 ..............................| 20,000
15
14,000 ..............................| 21,000
16
13,000 ..............................| 22,000
17
A. Find Sian's market equilibrium number of years of education.
B. Calculate the marginal social benefit schedule:
Yrs of Edu.|ben. ea/yr|extern.ben. to society|social ben.|cost per yr
9 ...........| ---------- | --------------------------- | ----------- | ---------
10 ......... | $20,000...| ......$8,000 .............| ---------- | $15,000
11 ......... | 19,000....| ....... 8,000 ............ | ----------- | 16,000
12 ......... | 18,000....| ....... 8,000 ............ | ----------- | 17,000
13 ......... | 17,000....| ....... 8,000 ............ | ----------- | 18,000
14 ......... | 16,000....| ....... 8,000 ............ | ----------- | 19,000
15 ......... | 15,000....| ....... 8,000 ............ | ----------- | 20,000
16 ......... | 14,000....| ....... 8,000 ............ | ----------- | 21,000
17 ......... | 13,000....| ....... 8,000 ............ | ----------- | 22,000
What is the socially optimal number of years of education?
C.You are in charge of education funding. Would you use a Pigouvian tax or a Pigouvian subsidy to induce Sian to choose the socially optimal amount of education?
D.How high would you set this tax or subsidy per year of education?