Education And The Social Optimum
In the presence of a positive externality, the social value of the good exceeds the private value. The optimal quantity, OPTIMUM. is therefore larger than the equilibrium quantity, Q MARKET.
found where the social-value curve and the supply curve (which represents costs) intersect. Hence, the socially optimal quantity is greater than the quantity determined by the private market. Once again, the government can correct the market failure by inducing market participants to internalize the externality. The appropriate response in the case of positive externalities is exactly the opposite to the case of negative externalities. To move the market equilibrium closer to the social optimum, a positive externality requires a subsidy. In fact, that is exactly the policy the government follows: Education is heavily subsidized through public schools and government scholarships To summarize: Negative externalities lead markets to produce a larger quantity than is socially desirable. Positive externalities lead markets to produce a smaller quantity than is socially desirable To remedy the problem, the government can internalize the externality by taxing goods that have negative externalities and subsidizing goods that have positive externalities.
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