The privately-owned school system in Smalltown has a virtually unlimited capacity. It accepts all applicants and operates on both tuition and private donations. Although every resident places value on having an educated community, the school's revenues have suffered lately due to a large decline in private donations from the elderly population. Since the benefit that each citizen receives from having an educated community is a public good, which of the following would not be correct?
A)The free-rider problem causes the private market to undersupply education to the community.
B)The government can potentially help the market reach a socially optimal level of education.
C)A tax increase to pay for education could potentially make the community better off.
D)The private market is the best way to supply education.

Question

Quizplus · Accepted Answer

The statement in option D, "The private market is the best way to supply education", is not correct. Since the privately-owned school system is suffering from a decline in donations, it suggests that the private market may not always be able to provide education efficiently. The statement also does not take into account the free-rider problem – where individuals can obtain the benefits of education without paying for it – which can cause the private market to undersupply education to the community. Therefore, the private market may not always be the best way to supply education.

The Privately-Owned School System in Smalltown Has a Virtually Unlimited