Question

Consider two households, one with an income twice as large as the other. Both households pay the equivalent of 5% of their income to consume free (public) education to the quantity PS (where PS >0 ). After public education, households have the option to consumer extra-curriculars. Wealthier households pay the full price, Pec, whereas lower income households pay a subsidized price, .5Pec.

a. Use AOG on the vertical axis and Educational Services (to include both public school and extra curricular on the horizontal surface. Draw the budget constraints for both higher income and lower income households. Be sure that any important points are labeled clearly.

Answer 1

Economic policies can address education market failures through subsidies, aligning the consumption of education with the social optimum. Graphically, this can be represented by budget constraints for different households based on income, and the trade-offs in resource allocation can be shown using the PPF and its slope to demonstrate opportunity cost.

Step-by-step explanation:

To discuss the economic aspects of education, particularly subsidization and opportunity cost, we must understand that policies can be structured to address market failures in the education sector. When education is free, it may not be socially optimal, as seen in the case of Peru, where families would choose to consume 18 years of education, far exceeding the socially optimal level of 10 years. To remedy this, policymakers can introduce subsidies to lower the cost of education for consumers, making it closely aligned with the social optimum. This can be represented on a graph that presents the AOG (All Other Goods) on the vertical axis and Educational Services (which include both public school and extracurricular activities) on the horizontal axis.

The budget constraints for a higher-income and a lower-income household can be depicted on this graph. The higher-income household will have a budget line starting at a point that represents income minus the 5% payment for public education. The lower-income household’s budget constraint will be at half of that of the higher-income household. Both will slope downwards, but the lower-income household’s slope will be less steep after public education due to the subsidized price for extracurricular activities.

Lastly, the concept of the Production Possibility Frontier (PPF) helps us understand the trade-offs and the opportunity cost of additional education as society makes choices between different allocations of resources, such as education and healthcare. The opportunity cost is represented by the slope of the PPF.