Chapter 7: Education (and positive externalities from Chapter 5)

1. Chapter 7: Education (and positive externalities from Chapter 5)

2. Positive externalities Positive externality: • Ex: fence between your and neighbors yard • Ex: research and development (R&D) • Ex. Flu shots, education The market failure with positive externalities occurs because people consider only their private benefits (MPB) and not the full social benefits (MSB) of their decisions.

3. Consider a Research and Development example • Firms in investing in R&D consider private benefits and costs. • Their costs of production (MC) will be upward sloping as usual. • _________________________________________________ (assuming there are significant returns to initial dollars placed into R&D and that benefits are eventually diminishing with additional dollars) • In an effort to maximize profits, firms will allocate resources such that ______________ resulting in an equilibrium quantity of research, Re • Graph on next slide

4. Positive Externalities--rosen MC MPB Re Researchper year

5. External benefits of R&D • However, there are marginal external benefits (MEB) to R&D. Examples include: • Creation of new production technology that allows all firms to produce more efficiently (ex: mechanization or computerization). • One medical breakthrough (equipment, drugs, new methods) often leads to a series of new developments or new branches of science. • _________________________________________________ with increasing amounts of R&D—diminishing returns and thus will be downward sloping. • Show the firm’s situation graphically (MC), MPB and MEB.

6. Positive Externalities--rosen MC MPB MEB Re Researchper year

7. Marginal Social Benefit (MSB) • The true social benefit of allocating dollars to R&D is given by marginal social benefit (MSB) curve. • Add together as done previously for negative externalities. • The socially efficient allocation of resources occurs where______________________________.

8. Positive Externalities--rosen MC MSB = MPB + MEB MPB MEB R1 R* Researchper year

9. Market failure and solution • The free market results in: _________________________________________________________________________________________________ • Prices or valuations of R&D are:_____________________________________________________________________________________________________________________ • one solution is to subsidize activities that have positive externalities called _____________________________ • The subsidy should be equal in dollar value to the marginal external benefit (MEB) at the efficient level (R*). (Exactly as we did for taxes!) • Commonly done for flu immunizations—shots are free or subsidized by government to encourage greater participation. • Empirical evidence suggests that the private (firm’s) rate of return on R&D is roughly __________. The social rate of return is approximately __________ Clearly, there are significant external benefits.

10. Public education and positive externalities “A stable and democratic society is impossible without a minimum degree of literacy and knowledge on the part of most citizens and without widespread acceptance of some common set of values. Education can contribute to both. In consequence, the gain from the education of a child accrues not only to the child but also to other members of the society.

11. Positive externalities in Public education • _________________________________: educated persons are more actively involved in their communities (including volunteerism) and have higher voter participation rates and may help improve the quality of the democratic process. • _______________________________: higher literacy is negatively related to crime rates (or at least violent crimes). More educated; less crime. • ________________________________ an educated work force is a more productive workforce; education is thought to be necessary for the creation of new technologies that may increase economic growth. • The presence of spillover benefits suggests that education should be subsidized in accordance with its external benefits. However, the US has “free and compulsory” K-12 education which cannot be justified on efficiency grounds alone!

12. Should there be public education? At what level? Typical arguments: 1. Strongest rationale for public education vs. private education revolves around: _____________________________________________________________________________________________________ • The suggestion is that if all education were privatized that schools would focus on the productivity skill set which increases wages for students and not necessarily place emphasis on the social conventions, citizenry, etc that often have small marginal benefits to individuals but have significant external benefits to society. • Evidence suggests these the “citizenry” benefits accrue early in education and may provide rationale for public education at the primary (elementary) level but less so at the secondary level or higher education

13. Arguments continued: 2. ___________________________________________: assuming that education is a normal good (as income increases, demand increases) families with higher incomes will provide more education than families with lower income. • ____________________________—refers to situations in which low-income persons have a chance to raise their incomes (be upwardly mobile in terms of income). • This is a widely held belief in democratic societies—that all persons should have access to opportunities for income mobility. • lack of public education reduces income mobility resulting in a larger gap between the “rich” and the “poor”. Public education should theoretically “level” the playing field among its citizens by providing “equal” access to all families.

14. Arguments for public education continued 3. Another argument in favor of public education focuses on financial ability to pay for education and __________________________________________ • In the absence of public education, families would have to self-finance all education resulting in large inequities between the “rich” and the “poor” • if a family had a talented child and they wanted to make sure their child had access to the best education they would need to borrow money to finance her education. Credit markets are unlikely to lend such funds (asymmetric information—banks cannot tell if a given child is a good investment or not); .

15. Arguments for public education 4. _______________________________________ • Even if such credit existed, would a family necessarily choose to pay for education for a child if it meant sacrificing consumption for the rest of the family. Optimal provision of private education is not likely. • As we will discuss later, a similar argument is used to against public education suggesting that public education “crowds out” private education and families will opt to send their kids to the free public school instead of investing in a better-quality, private school.

16. Arguments against public education 1. Government provision of K-12 education is inefficient—costs are too high given educational attainments (outcomes) • the single largest expenditure item for state and local governments is education. • They spend on average __________of their budgets to provide this government service. • The US spends more than any other nation per pupil –around ______________ for K-12 education. • The US spends more than ______________per pupil when including higher education—more than any other nation in the world.

17. Real Annual Expenditure Per Pupil in Public Elementary and Secondary Schools (K-12) Source: US Bureau of the Census [2009, p. 151]

18. US spending vs. international spending Real Annual Expenditures on Private and Public Schools, All Levels of Education (2007)

19. Arguments against Public Education-continued 2. Although US spending levels on education are the highest in the world, US educational outcomes (K-12) are only “average” internationally and in some cases are much lower than countries which far less wealth. • Scientific Literacy: The United States ________________ OECD countries in scientific literacy, and the U.S. score of 489 fell below the OECD average of 500 (OECD 2007). • _________________________ of U.S. fifteen-year-olds do not reach the baseline level of science achievement. This is the level at which students begin to demonstrate the science competencies that will enable them to use science and technology in life situations (OECD 2007)

20. US education statistics continued • Mathematics Literacy: The United States ranks _________________of OECD countries in mathematics literacy, and the average score of 474 fell well below the OECD average of 498. Scores have not measurably changed since 2003, when the United States ranked 24th of 29 countries (OECD 2007b). • ____________________________of American fifteen-year-olds performed below the baseline level of mathematics proficiency at which students begin to demonstrate the kind of skills that enable them to use mathematics actively in daily life (OECD 2007b) • Reading Literacy: The United States ranked of __________________ OECD countries in reading literacy, and with a score of 495, came in near the OECD average of 500

21. Arguments against public education 3. __________________________________________________________________________________ • _________________________refers to situations in which public provision of a good substitutes for private provision of a good (reducing demand for privately provided goods). • Such crowding out may result in lower educational outcomes.

22. How does crowing out occur? A x Quantity of all other goods ii i B Quantity of Education ep e0

23. Graph summary • In the absence of public education each person maximizes utility by selecting the highest indifference curve attainable resulting in Eo education purchased. • If public education is provided at a fixed level, Ep, then the consumer re-evaluates his utility maximization and can now reach a higher indifference curve by going to public school. • Private education is “crowded out” by the existence of public education. • This doesn’t have to be the case, depending on preferences, individuals may not reduce private education and no crowding out may occur.

24. No Crowding Out occurs if there is a strong preference for larger quantities of education A x Quantity of all other goods ii i B Quantity of Education ep e0

25. ARGUMENTS AGAINST PUBLIC EDUCATION CONTINUED 4. __________________________________________________________________________________________ • This results in tremendous inequity between “rich” and “poor” geographic areas. • Many believe states should find alternative mechanisms, such as income taxes (as done in Iowa), to more fairly distribute funds to schools. • PBS video

26. What factors are used to measure educational outcomes? • Difficulty is that test scores alone do not tell you much. Students in different school districts may have other family/socioeconomic characteristics that impact learning. • Evidence suggests there is no direct relationship between spending and outcomes.

27. what are the leading determinants in educational success of students • Clearly, money is not the answer. Spending per pupil has more than doubled in the last 25 years and educational outcomes are no better (and in many cases worse) on average. • Information here can be biased. Sometimes wealthier school districts have smaller classes and better educational outcomes. However, this could be because of different socioeconomic factors and not necessarily small class size. • Information may be biased in the other direction too. Sometimes we have small classes for students with learning disadvantages. Their test scores may be lower suggesting small class size has a negative impact on learning. • Literature suggests that to reduce the teacher-student ratio by 10% (go from 30 students to 1 teacher to 27 students to 1 teacher) costs an additional $700 per student. • Costs are very high and sometimes reduces the experience level of teachers (hire on more new teachers) • Within the literature, the single most important factor for a child’s educational success is :_________________________________________

28. School vouchers • In essence, a school voucher is money given to parents of a child attending a K-12 school that may be applied to private education instead of going to the school to which the child is assigned. • The notion of school vouchers were first introduced (in a modern way) in the 1950s by Milton Friedman. • Friedman, a Nobel Prize Economists (1976) created a book series entitled “Free to Choose” in 1980. The series examined how free markets encourage prosperity and included an entire section on school vouchers. PBS created a series based on “Free to Choose” with Friedman narrating. This started the “modern” trend toward usage of school vouchers. • www.ideachannel.tv (you can view the original broadcast as volume 6: What is wrong with our schools?)

29. Friedman and school vouchers • According to Friedman, school vouchers would increase competition among school and improve cost efficiency. • Schools would have incentives to: • Schools would have incentives to: • Parents would be “free to choose” where there children went to school increasing incentives for parents to become more involved in the educational process. • Friedman suggests in 1980 that the centralized school system is run by bureaucrats that may have different “goals” than those of parents and that parents do not have power in the system to make significant changes.

30. Graph of how vouchers work

31. Arguments from Proponents of school vouchers • _____________________________vouchers allow parents the freedom of choice so they may more closely match their educational choices with their tastes. • ____________________________________________ suggests that people already individually determine this through their location decision. Families locate in certain areas that have the proper mix of property taxes (for education) and educational quality. • However, property taxes are used to supply an array of government services and people make their location decision based on many attributes, not just schooling; therefore this self-sorting mechanism may not work perfectly • _______________________________results in greater cost efficiency and better educational outcomes (quality). • This includes greater educational outcomes of public schools which must now improve to keep their funding. • Remember, school funding per pupil has doubled since 1980 but test scores have not improved. • Further, administrative staff in public schools has grown by 65% since 1970 and the number of students has only grown by 2% (US Dept of Education 2006).

32. Proponents of vouchers continued 3. Vouchers allow students in failing schools an escape hatch—a way to improve their educational quality and “income mobility” 4. Vouchers provide parents a stronger voice in their children’s education (curriculum, methodology, etc). Since they may easily move their child away from one school to another better option, schools are more likely to be open to parental input.

33. Arguments—opponents of school vouchers • ___________________________________________the positive externalities associated with civic engagement, etc may be minimized by schools to focus on specialty skill sets (tastes) and undercuts the benefit of common programming. • With private education there is no “educational standard” or way of enforcing standards across schools • Opponents cite examples of schools focusing on the “arts” and not having comprehensive programming such as basic reading and math skills. • Proponents of vouchers say this could easily be handled by setting minimum standards and giving standardized tests. • ______________________________________________—as the best students leave failing schools for better opportunities the worst students remain reducing educational quality. • “cream skimming”— • Private schools have many school voucher applicants but will only take the “good” students and not “all” students

34. Arguments against vouchers continued 3. __________________________________________: if motivated parents differ from disinterested parents along income, race, or ethnic lines you will observe a “sorting” of students along these lines. • proponents of vouchers say the educational freedom will result in less segregation as lower income students can move to better school districts. 4. _____________________________________________________________________________________ there are cost efficiencies in current school districts and much like a monopoly, if you increase competition by providing lots of smaller schools the economies of scale are foregone resulting in higher costs. • how can a rural area support enough schools for adequate competition when there is not sufficient demand (children).

35. Opponents of vouchers continued 5. _______________________________Vouchers are based on “per pupil spending” but this disadvantages families with children requiring special education • students with developmental and learning disabilities require additional monitoring, diagnostic testing, and accommodations. The per pupil spending level is not enough to provide adequately for these children. 6. ___________________________________ many private schools have a religious affiliation. Many people believe it is unfair and/or unconstitutional to spend government dollars on religious education.

36. School vouchers in practice today • School vouchers have been used in other countries for many years (including Chile, Hong Kong, Sweden, Norway, Ireland). • In most cases, the voucher is: • In some states, it is the “average” spending level per child in the state. • The school voucher can be used at any qualifying private school to fully or partially cover tuition expense. • Much controversy over what schools should qualify. • Heated debate over “religious” private education such as Catholic private schools and “separation of church and state”.

37. US Vouchers • In the US, the first school voucher system was done in Milwaukee, Wisconsin in 1990. • This was a small scale voucher system in which families earning income no more than 175% of the poverty line could receive a voucher worth $3200 that could be used at any non-religious private school. • As of 2007, the program has expanded and 15,000 students in Milwaukee are using vouchers. • Other areas with vouchers include: • Washington D.C. (called the DC Opportunity Scholarship Program); • Cleveland, Ohio (after much legal battling over constitutional issues) • Florida (Florida Opportunity Scholarship Program)—allowed students in failing schools to attend other schools of their choice—declared unconstitutional in 2005. Still facing legal issues and back on the political agenda currently

38. Evidence on effectiveness of vouchers • Evidence is mixed with regard to effectiveness of vouchers (measured in terms of educational success or higher scores on exams, dropout rates, etc). • Part of the problem is accounting for intangible, and often, immeasurable differences among students such as ambition, parental influence, etc. • Students that use vouchers are probably more motivated than those that do not. • Also, in some states or voucher areas, private school select admits from an applicant pool most likely taking the best students.

39. Milwaukee voucher program data • Much of the empirical evidence is based on the Milwaukee pilot program for a few reasons: • participating private schools had to accept any voucher • If the private school was “oversubscribed” –meaning that there were more applicants than open spots then they had to determine admission via random lottery • This means that empirically you could now compare those that wanted to use vouchers in two different environments: private school vs. public school without bias • Control group: • Treatment group:

40. Early Findings by rouse (1998) and others • Rouse: There was an increase in educational success within the treatment group • An increase in math scores by ______________________that students were in private school relative to the control group • Other measures in reading, etc were not statistically different • Findings in Colombia Voucher Program which has over 125,000 students (Angrist et al 2002) • Students that won vouchers via lottery were : _____________________________________. • Students scored higher on standardized tests • The cost to government was ___________________and wages for the “winners” increased between ____________________

41. Other types of programs and policies that provide public school incentives • _______________________________ schools must measure performance of students to ensure they are meeting or exceeding educational standards • (Handshek and Raymond 2004) evidence: • As of 2002, 25 states in US directly linked student promotion to the next grade of graduation to performance on state and local assessment tests • 18 states rewarded teachers and/or administrators for successful student performance on exams • 20 states penalized teachers and administrators for subpar student performance • Found a direct link between rewards/penalties and school performance—”sizeable improvements in test scores”

42. No child left behind (NCLB) • This idea of school accountability was formalized into US law in 2001 with the “No Child Left Behind Act of 2001” (President Bush) • Based on the idea of “standards-based educational reform” • Each state sets its own standard (assessment test and minimum compliance) • States that do not submit assessment plans and outcomes will have their federal funding rescinded • Federal funding for education NCLB increased initially from $17.4 billion in 2001 to $24.4 billion in 2007 (40% increase) in part to pay for assessment, to pay for new and improved school programming, and to fund reward programs, etc.

43. Proponents of nclb • Suggest that NCLB: • Schools must provide detailed reports to parenting on the teacher qualifications in the school where their child attends • Creates common standards among all school districts in a state • Forces schools identify “at risk” populations and target programs at those students • provides school choice for students in failing schools (schools receiving a grade of F—students can move to a new district)

44. Criticisms of no child left behind • Implication is that teachers narrowly focus education on the tested items enabling students to perform well on test and not a broad education • There is empirical evidence which suggests that this is the case—students do well on the standardized test but when given an alternative test, scores are significantly reduced. • Jacob (2002) found that in both Chicago and Florida school systems many low performing students were reclassified as special education students or disabled so scores would not be counted in the school average. • Jacob and Levitt (2003) found evidence that teachers may cheat (providing answers) if they are rewarded financially for improved student performance.

45. Criticisms of NCLB 3. States may actual lower standards to ensure school districts meet standards to maintain their federal funds 4. Talented students may receive less funding and funding is shifted to at risk populations 5. Less funding for arts and elective courses as more resources are focused on the basics of math, science, and reading. 6. NCLB requires military recruiter access to schools facilitating military enrollment

46. Charter schools and magnet schools—school choice alternative • ______________________ are small, independent schools that are not subject to many of the regulations imposed on traditional public schools. • Operated by private enterprises with own internal regulations • They do not have to follow same restrictive hiring procedures for teachers • More flexibility in curriculum, hiring and firing of administrative staff. • Charter schools often have a particular focus—either in terms of the learning objectives or the student demographic • Ex: Beardstown, IL Charter School for English as a Second Language Students

47. Magnet schools • _______________________: special public schools set up to attract talented students or students interested in a particular subject or teaching style • School of the arts • Schools of Science and Technology • Magnet schools are still public schools and must abide by administrative procedures and policies. • Empirical evidence of educational improvement in magnet schools is mixed or inconclusive. • Most studies find no improvement or no statistically significant improvement • Where small gains in improvement exist is when there is a large degree of competition.