Education is an example of positive externalities with a positive spillover effect. This is the rationale for government to support higher education to increase the public benefit and drive the education system towards its socially optimal level when a market failure exists.

a) Using appropriate diagram/s, indicate the private provision of higher education and socially optimal level of higher education (without any funding/subsidies provided by the government). Explain why the private market cannot provide the socially optimal level of education. (3 marks)

b) Suppose that the Australian education sector was not providing the socially optimal level of education. However, the Federal Budget 2022-23 pledges $25.3 billion to Australian Schools. Using diagram/s, illustrate the socially optimal level of higher education with government funding boost when the proposed reform passes through parliament and compare the outcome with the previous equilibrium output of education. (4 marks)