Failure in education industry arises from underallocation, leading to allocative inefficiency. There is also inequity, because education is a basic good and might prohibitively expensive for all people to consume.
Governments have to resolve inequity and inefficiency in this market.
Free Provision: Governments subsidizing the entire cost of production or consumption. This shifts the supply to the right as the cost of production drops to zero. Society now consumes where MPB=MPC (free provision) at P=0
Good: P=0, Perfect equity, especially important for basic necessity like education and healthcare.
Bad: Society now consumes beyond Qs, socially optimal output. There is now overconsumption and thus allocative inefficiency represented by the dwl (huge blue triangle). For example, when UK governments provide free healthcare, there is an overallocation of resources and a welfare loss. Wastage occurs and governments have to fund this burden using tax revenues, which creates a strain on the economy.
Governments can use a variety of measures, amongst which, subsidy. Subsidy is a form of price control that aims to reduce cost of production and consumption. This solves market failure as it internalizes the external benefits onto the parties who created them. For example, consumers are compensated through a subsidy for the increased productivity that society derives from them having an education. This makes the cost of education cheaper for the individual. The allocation of such resources will then be encouraged, and if all of the external benefits are indeed internalized, then MEB=0. With reference to diagram, allocation now is increased to Qs, where MPB=new MPC(subsidy). As a result, allocative efficiency is achieved, there is no deadweight loss, and welfare is maximized.
Good: Society consumes output that maximizes social welfare. This outcome is allocative efficient. It also promotes equity because the product is cheaper and more affordable for the general population.
Bad: The external benefits were only an estimation, and the subsidy might not have internalized the entire external benefits. Even so, with a subsidy, the price might still be too high for certain individuals; there might not be perfect equity. It also incurs government expenditure that has to be financed from higher taxes.
Education and Regulation Government should educate people about external benefits. Positive advertising and education/legislation could be implemented by providing information on external benefits (such as the benefits of healthcare and a proper education) and this would increase the demand over time, encouraging consumption. Legislation such as mandatory health checkups and education could be imposed to ensure greater consumption in society. This would ensure that there is greater consumption over time although it should be accompanied with a subsidy or provision. There is a rise in demand over time. The limitation of such policies are that they are long run in nature, especially for education. It also requires governments spending intensively, which incurs opportunity costs, since such spending could be better used in other areas such as subsidizing health care, education, etc.
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