Identify and Discuss Three (3) Externalities (positive or Negative) of Public Education

ECO 405

The Externalities of Education

Strayer University

Weedor Paywala

5/31/2012

Identify and discuss three (3) externalities (positive or negative) of public education.

Externality shows up whenever the benefit or cost of consuming a good affects people that aren't actually consuming it. They come in two forms: positive and negative externalities. We are all in college because we want to be educated and live happy lives. Getting an education don't just benefit you, it benefits society as well. Positive externalities are always undersupplied by the market. This is because the marginal private benefit is lower than the marginal social benefit. Take our education example. If someone was trying to decide if they wanted to attend college, they would weigh the cost of doing so again their personal benefit. People will attend college as long as their marginal private benefit is greater than or equal to marginal cost. But if the market were working efficiently, they would decide to attend as long as marginal social benefit was at greater than or equal to marginal cost, this result in an undersupply of goods with positive externalities.

Pollution is the classic negative externality. Negative externalities are always oversupplied in the market. In other words, there is more production of goods that have negative externalities than is considered socially efficient. This happens because the marginal private cost of production is less than the marginal social cost of production.

There are a variety of ways to deal with externalities. These include Assigning property rights, Command/Control, Taxation/Subsidies, and Permits. There are a variety of costs and Drawback associated with property right negotiations, including the time and money required to reach agreements. The government might place a limit on the amount of pollution firms are allowed to produce in an attempt to solve the market inefficiency. The major complaint is that this method doesn't allow firms to find more efficient ways of doing things, but instead requires them to handle things in a specific way. It's also tough to monitor some negative externality levels, such as pounds of sulfur dioxide produced. The government can tax things that create negative externalities, and subsidize those things that create positive externalities. For our education example, if the government subsidizes students, it raises their marginal private benefit. If the subsidy amount is correct, then MPB = MSB, and we have an efficient market outcome. The actual amount of the externality produced isn't necessarily