Linking consumption externalities with optimal accumulation of human and physical capital and intergenerational transfers

This paper opens a new perspective from which one can explain the presence of government intervention in education even in the absence of human capital externality. It argues that consumption externalities can provide rationale for government intervention in education. Within the context of overlapping generations economy, it has also been shown that competitive equilibrium either underaccumulates both physical and human capital or overaccumulates both. Thus the result rules out the possibility of competitive equilibrium deviating from the social optimum in its allocation of physical and human capital in opposite directions. Immediate policy issues have also been discussed. Keywords: Consumption externality, human capital, education subsidy JEL Classi…cation: E6, E21, H52, H55