Many State Governments Support Higher Education Through Subsidies

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The Answer is The subsidy works as a negative excise tax. In the diagram, this results in a shift down of supply by $10,000 (from S₀ to S₁). At the original price less the subsidy there is excess demand (Q_D> Q₀) for college degrees. Because quantity demanded rises when price declines, the drop in tuition is less than the dollar amount of the subsidy. The new equilibrium is at a tuition of $15,000 and Q* enrolled students.

The subsidy works as a negative excise tax. In the diagram, this results in a shift down of supply by $10,000 (from S<sub>0</sub> to S<sub>1</sub>). At the original price less the subsidy there is excess demand (Q<sub>D </sub>> Q<sub>0</sub>) for college degrees. Because quantity demanded rises when price declines, the drop in tuition is less than the dollar amount of the subsidy. The new equilibrium is at a tuition of $15,000 and Q* enrolled students.

Many State Governments Support Higher Education Through Subsidies

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Many State Governments Support Higher Education Through Subsidies

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