Question

Use two market diagrams to explain how an increase in state subsidies to public colleges might affect tuition and enrollments in both public and private colleges.

Short answer

The two market diagrams are plotted below:

The subsidies provided in public colleges act as a supply shifter. The result is

• lower tuition fees and a higher number of enrolments in public colleges;
• lower tuition fees and a lower number of enrolments in private colleges.

Step-by-step solution

Effect of subsidy on tuition fees in public colleges.

The effect of the subsidy on public colleges is explained below using a diagram.

The provision of subsidy is one of the determinants of supply that can shift the supply curve to the right. The subsidy on tuition fees will shift the supply of higher education (number of seats)curve to the right. The demand curve is unaffected.

The supply curve shift reduces the equilibrium level of tuition fees from P to P1 and increases the number of enrollments from Q to $Q_1$,as shown above. Thus, the subsidy increases the enrolment number and reduces the tuition fees in public colleges.

Effect of subsidy on tuition fees and enrolment number in private colleges

The indirect effect of the subsidy on private colleges is explained below using a diagram.

Private colleges are considered a replacement for public colleges; they are substitutes of each other. The reduced tuition prices in public colleges encourage potential students to shift to public colleges and reduce their consumption of private colleges. This leads to a backward shift in the demand for seats in private colleges. The supply curve is unaffected.

The demand curve shift changes the equilibrium state. It results in fewer enrolments than before (fall from Q to $Q_1$)and lower tuition fees (fall from P to${\mathrm{P}}_1$ ). Thus, the subsidy given to public colleges reduces the enrolment and tuition fees in private colleges.