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1. Education is an example of positive externalities with positive spill over effect.
This is the rationale for government to support higher education to increase
the public benefit when market failure exists and drive the education system towards its socially optimal level. a) Using appropriate diagramls, indicate the private provision of higher
education and socially optimal level of higher education (without any funding/subsidies provided by the government). Explain why private market cannot provide the socially optimal level of education. (2 marks) b) Suppose that Australian universities have been receiving enough funding to
provide socially optimal level of higher education. However, the Federal
Budget 2017 has indicated to have substantial funding cut to higher
education. "Labour is pleading to block a $2.8 billion funding cut to the higher
education sector which will force the students to pay off loans earlier and
make degrees more expensive”. Using appropriate diagram/s, illustrate the
socially optimal level of higher education with government funding and the
outcome of $2.8 billion funding cut it the proposed reform pass through parliament (4 marks)

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