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Preschool education produces positive externalities, causing partial market failure due to third parties, in this case companies, are able to gain benefits like a more educated work force in the future. However, as the parents are concerned about their private benefits, they ignore these externalities. The underconsumption is also due to imperfect information from the parents, who are "often not fully aware of the benefits of preschool education". In the graph, the MPB perceived causes equilibrium quantity Qp to be lower than actual equilibrium Qs, hence dead weight loss ab1c is formed.

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the positive externality of education is the social benefit of society by educating the children. imperfect information giving rise to underconsumption of preschool services. consumer are not aware of the full benefits of preschool education which hhelps to develop important skills. This results in deadweight loss of social benefit because there could be more social benefit

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Cause of market failure in this context

imperfect information—> parents underestimated the benefits of preschool education

Parents only consider their MPC and MPB —> MPC of paying preschool fees

Parents are not consuming enough of the public good of preschool education

There is a MEB from sending children to preschool education —> contributes to creating the workforces needed in the 21st century

Existence of MEB —> MSB > MPB

Government intervene to raise socially optimum output to Qs, where MSB = MSC

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1. Positive externality: more educated manpower with education

2. Imperfect information: parents are not fully aware of benefits and underconsume

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Guiding questions:

What are the causes of market failure in this context?

Is there only one cause of market failure?

What diagrams do you need to draw?