Earning a college degree has some well-known and well-documented advantageous impacts on an individual. That is the motivation for people to delay their entry into the workforce for four or five years while they earn a baccalaureate degree. However, studies have shown significant positive impactson the community, the state, and societycaused by higher education. For example, states with more college-educated people also display better health conditions, higher earnings, lower crime, more innovation, and a general increased standard of living. In the language of our current module, higher education is apositive externality. The person deciding to attend college is doing it for the benefits she will receive from this new knowledge and experience. However, it is also true that there will be positive spillover effects on her community and state.

Question 1

In the lecture videos, we discovered that when an activity also produces a positive externality, the marginal social benefit (MSB) from that activity was different than the marginal private benefit (MPB) curve (the MPB is also known as our demand curve). State what this difference is and explain the reason for that difference.

We also discovered that the socially optimal level of this activity would be systematically different than what the market would produce. Explain that difference.