5 The "market" for a college degree in a particular country has the following supply and demand curves:
QD = 75,000 - 3P
QS = 22,500 + 2P
where Q is measured in number of undergraduate degrees, and P is the price per undergraduate degree in dollars.
In this country, the government does not currently regulate higher education, meaning that college education is only offered by private universities. Yet, as you certainly know, education is a service that generates positive externalities on the rest of society. The marginal external benefit (MEB) from higher education is given by the following expression:
MEB = 100Q - 1,260
(a) Provide a few brief examples of positive externalities induced by education.
Individuals with a college degree tend to have more social connections, to experience lower unemployment, and to have better health status.
(b) Calculate the competitive price and output, assuming no government intervention in higher education.
(c) Determine the socially optimal levels for price and output. Briefly explain why both outcomes may differ.
(d) To broaden access to higher education, the government decides to offer a subsidy S (in dollars) to universities for each degree awarded. What is the optimal amount for this subsidy?
(e) Sketch a rough diagram showing the deadweight loss for society induced by the absence of public intervention in the higher-education sector. The diagram does not have to be up-to-scale.