Positive Externalities in Education

Steps:

• Identify the economic rationale for government intervention in markets for goods like education.
• Recognize education provides benefits to society beyond the individual, such as a skilled workforce and reduced crime.
• Determine that free markets lead to underprovision due to these externalities.
• Conclude governments subsidize to achieve socially optimal levels, addressing free rider issues.

Why C is correct:

• Education exhibits public good characteristics with positive externalities; social benefits exceed private benefits, causing free riders who benefit without paying, so markets underprovide it (per public goods theory).

Why the others are wrong:

• A: Full consumer awareness would increase private demand, reducing the need for government provision.
• B: Education faces underconsumption, not overconsumption, in free markets due to externalities.
• D: Private benefits often exceed costs for individuals, but social benefits are higher, leading to underinvestment without intervention.

Final answer: C