Suppose that elementary education creates a positive externality. If the government subsidizes education by an amount equal to the per-unit externality it creates, then
A)the equilibrium quantity of education will equal the socially optimal quantity of education.
B)the equilibrium quantity of education will be greater than the socially optimal quantity of education.
C)the equilibrium quantity of education will be less than the socially optimal quantity of education.
D)There is not enough information to answer the question.

Question

Quizplus · Accepted Answer

When the government subsidizes education by an amount equal to the per-unit externality it creates, it will reduce the cost of education for individuals and increase the demand for education. This leads to an increase in the equilibrium quantity of education. Since the subsidy is equal to the per-unit externality, it will shift the demand curve outwards by exactly the amount of the externality. As a result, the equilibrium quantity of education will equal the socially optimal quantity of education. Therefore, choice A is the correct answer.

Suppose That Elementary Education Creates a Positive Externality