WHY SHOULD THE GOVERNMENT BE INVOLVED IN EDUCATION ?

1. WHY SHOULD THE GOVERNMENT BE INVOLVED IN EDUCATION? • There are potential positive externalities, however. These are related to: • Productivity • Citizenship • Credit market failures • Failure to maximize family utility

2. Productivity • In general, the extra productivity from education is largely internalized. However, social benefits from higher productivity occur in two ways. • The first is “spillovers” to other workers: a person’s productivity could raise the productivity of their coworkers, thus raising their wages and well being. • The second is through taxes: if higher productivity is reflected in higher pay, then the government collects more tax revenues as a result.

3. Citizenship • Education may make people more responsible citizens, by participating to a greater extent in the democratic process and reducing the likelihood of criminal activity. • These arguments are fairly compelling for basic education such as elementary school, but provide less rationale for secondary or higher education.

4. Credit Market Failures • Another justification may be credit market failures. • In principle, a family could borrow against a child’s future earnings to finance the education, but unlike a home purchase, there is no collateral. • The creditor cannot really observe if the child is a good risk to pay back the loan or not, and will generally offer too little credit in a situation like this.

5. Credit Market Failures • The solution to credit market failures would be to make loans available to finance education, but the government in the U.S. (and elsewhere) do not take on this role except in the financing of higher education. • Rather, the government supplies a fixed level of publicly-funded education.

6. Family Utility • Even with well-functioning credit markets, there may still be failures to maximize family utility. • Parents may not choose appropriate levels of education for their children; even with loans, private education would still involve some sacrifice on the part of parents, such as paying the cost of schooling not covered by the loans. • Without public provision, some smart children would be penalized for having selfish parents.

7. Redistribution • In addition to motivations based on positive externalities, another key justification for public provision involves redistribution. • Public education provides a level playing field that promotes income mobility.

8. How can the government intervene in Public education • There are two ways that the government could intervene • By introducing a certain amount of free public education, Ef, figure 1 • By introducing a certain amount of vouchers to families for education, Ef, figure 2

9. Free Public Education and Crowding Out • The government provides a fixed level (12 years) of education at no cost. • A problem with the system of public education provision is that it may crowd out private education provision.

10. Figure 1 Other goods spending a b g1 ICX c g2 ICY g3 ICZ b Education spending 0 EF e1 e2 e3

11. Free Public Education and Crowding Out • In practice, the government does neither. • Instead, it provides a fixed level (12 years) of education at no cost. • A problem with the system of public education provision is that it may crowd out private education provision.

12. A way to solve the crowd-out problem is with vouchers • The idea is that educational vouchers are a credit given parents to be used for public or private education • A voucher that could be used for public school or for more expensive private school

13. Figure 2 Other goods C Y2 ICX Z2 ICY ICZ EF 0 Education spending

14. There are two reasons that vouchers help solve the problem of crowding out • Consumer sovereignty • This allows that individuals can more closely choose the education choice that matches their taste • Competition • Also this will improve education be making the education market competitive and make private markets function efficiently

15. However there are some major problems with vouchers • Large school specialization • May lead to segregation • It does not work well for high-cost students for example special education • The education market may not be competitive

16. May lead to specialization • A problem with vouchers is that it may lead to school specialization • In an attempt to attract more customers a school may become highly specialized. For example a “sports” school • This could be a problem because the school may not focus as heavily on what is thought as the major components of education

17. May lead to segregation • Vouchers could bring up the problem of segregation • It is likely if children of uninformed parents will end up in low-quality public schools, while children of motivated parents end up in higher quality private schools.

18. It does not work well for high-cost students • Some students may be more costly to educate • This may lead to a school choosing not to allow these students because of the higher costs

19. It may be true that the voucher school market is not efficient • This could be true because the education market could be viewed as a natural monopoly • This is because of some of the fixed costs such as the school house • Taking this into account it is not efficient to have many relatively small schools competing with each other • Natural monopoly- is when because of the nature of the good it is advantageous to having only on monopoly provider

20. Bottom line on vouchers • There is little evidence to support that choice of schools improves outcomes • Vouchers also appear to improves performance for those that choose private schools but raises some other moral questions

21. A major recent reform • This was the No Child Left Behind Act of 2001. • It requires states to test students in grades 3 through 8; the results are used to judge school performance. • Underperforming schools are subject to various sanctions. • Also has a teacher quality requirement • Also there will be extensive government funded studies of strategies within the classroom

22. Experience with Public School Incentives • On the other hand, this sort accountability had two unintended effects: • Schools and teachers “teach to the test.” • Schools may try to manipulate test scores by reclassifying low-skilled students as special-education, changing their cafeteria menus, and even cheating.

23. The role of government in higher education • Pell grants • Loans • Direct student loans • Guaranteed student loans • State provisions

24. Pell grants • A subsidy to higher education by the federal government that provides grants to poorer families

25. Loans for higher education • Direct student loans • Loans taken directly from the federal Department of Education • Guaranteed student loans • Loans taken for the private banks which the government guarantees repayment

26. State provisions • Direct financing of higher education from the government • This is the largest government spending on higher education