d) The original assumption for Gondolin stated that the marginal private benefit is equal to the marginal social benefit. Now instead assume that the marginal social benefit of tertiary education is greater than the marginal private benefit. That is, assume there is a positive externality associated with having a tertiary education. Draw this in a new figure. Is the deadweight loss from the subsidy increased or decreased with the introduction of the positive externality? Why? **PLEASE ONLY ANSWER PART D***
Most countries today have subsidised the provision of education. Consider an imaginary country, Gondolin. Gondolin pays a subsidy of $10 000 per year to each student enrolled in tertiary education.
(a) Depict, with the help of a figure, the initial market for tertiary education in Gondolin, assume that: 1) education was left to the competitive free market; 2) the marginal private benefit is equal to the marginal social benefit; 3) the marginal private cost is equal to the marginal
(b) Identify the area of the figure you drew in (a) that depicts the total size of the subsidy paid by the government to the students enrolled in tertiary education in Gondolin. Who gains and who loses from such a subsidy?
(c) Subsidies lead to overproduction and overconsumption relative to the
competitive equilibrium. What is the
(d) The original assumption for Gondolin stated that the marginal private benefit is equal to the marginal social benefit. Now instead assume that the marginal social benefit of tertiary education is greater than the marginal private benefit. That is, assume there is a positive externality associated with having a tertiary education. Draw this in a new figure. Is the deadweight loss from the subsidy
increased or decreased with the introduction of the positive externality? Why?
**PLEASE ONLY ANSWER PART D***
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