1.7. Education is an example of an activity that generates a positive externality: acquiring more education benefits the individual student and having a more highly educated workforce 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.

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

b. Calculate the marginal social benefit schedule. 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? How high would you set this tax or subsidy per year of education?

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Quantity of education (years) 9 Sian's marginal benefit Sian's marginal cost per year per year -$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