Prompt

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 impacts on the community, the state, and society caused 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 a positive 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.

Your answer needs to be a little bit longer. Write a few sentences to complete your assignment.
Question 2
Let’s continue probing this discussion of higher education as a positive externality. Given that the
market outcome is different than the socially optimal outcome, there could be an opportunity for
governments to intervene in a corrective matter.

Suggest two possible actions by the government that could push the outcome closer to the
socially optimal level. Explain.

If we did choose one or both of these options, policy makers would need to make some hard
decisions about budget allocation. Given the value of higher education, why is this a “hard
decision?”

Your answer needs to be a little bit longer. Write a few sentences to complete your assignment.
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