question archive The table shows the marginal benefit schedule from a college education
The table shows the marginal benefit schedule from a college education
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The table shows the marginal benefit schedule from a college education.
The marginal cost of educating a college student is $3,000 a year. The marginal external benefit from a college education is a constant $2,000 per student per year.
There are no public colleges.
If the government offers vouchers to students, what is the value of the voucher that will encourage the efficient number of students to enroll? How many students will enroll considering the value of the voucher?
| Students (millions per year) | Marginal Benefit (dollars per student per year) |
|---|---|
| 1 | 5,000 |
| 2 | 3,000 |
| 3 | 2,000 |
| 4 | 1,500 |
| 5 | 1,200 |
| 6 | 1,000 |
| 7 | 800 |
| 8 | 500 |
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Students will equate marginal cost with marginal benefit. If marginal cost is $3,000, then 2 million students will enroll. The socially optimal number takes into account the external benefit of a college education, so the social marginal cost is $3,000 - $2,000 = $1,000. Therefore, only 6 million students will enroll. If the government wants to enroll the socially efficient number of students, the voucher needs to be equal to the external marginal benefit of $2,000.
