# Unit 9 Assignment: Externalities

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Unit 9 Assignment: Externalities
Unit 9 Assignment: Externalities
Name: - Angelina Grooms
Course Number: - AB224
Section Number: - 04
Unit Number: - 9
Date: - January 8th, 2014

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

a. Find Sian’s market equilibrium number of years of education
a. 12.5 years

b. 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 28,000
\$15,000
11
19,000
8,000
27,000
16,000
12
18,000
8,000
26,000
17,000
13
17,000
8,000 25,000
18,000
14
16,000
8,000 24,000
19,000
15
15,000
8,000 23,000
20,000
16
14,000
8,000 22,000
21,000
17
13,000
8,000 21,000
22,000

c. What is the socially optimal number of years of education?
a. 16.5 years

d. 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.
a. Subsidy to increase Sian’s marginal benefit, so Sian would be motivated to chose the socially optimal amount of education while profiting more.

e. How high would you set

References: Krugman, P., & Wells, R. (2013). Microeconomics, 3rd Edition. New York: Worth Publishers. Retrieved from: https://online.vitalsource.com/#/books/146416651X  Unit 9 Assignment: Education a positive externality

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