Reference no: EM13396007

Education is an example of a positive externality: acquiring more education benefits the individual student and having a more highly educated work force is good for the economy as a whole.

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.

Quantity of Education (in years)	Sian's Marginal Benefit per year	Sian's Marginal Cost per year
9	-	-
10	$20,000	$15,000
11	19,000	16,000
12	18,000	17,000
13	17,000	18,000
14	16,000	19,000
15	15,000	20,000
16	14,000	21,000
17	13,000	22,000

1. Find Sian's market equilibrium number of years of education
2. Calculate the marginal social benefit schedule

Years of Education	Sian's marginal benefit per year	Marginal external benefit to society	Marginal social benefit	Sian's marginal cost per year
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

1. What is the socially optimal number of years of education?
2. 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?  Justify your answer.
3. How high would you set this tax or subsidy per year of education? Justify your answer.