The Economics of Education Crisis and Reform

1. 6 The Economics of EducationCrisis and Reform

2. Introduction • Effectiveness of the US education system • The US education “crisis” • Alternative ways of offering education • Rationales for government intervention

3. Effectiveness of K-12 Education American eighth graders versus the world, 2003

4. Effectiveness of K-12 Education International Comparison of Education Expenditure

5. Education as a Publicly Provided Good • K-12 education is delivered in a system of primarily public education • 90% of school aged children in the US attend public schools

6. Objective • Understanding the market for education • What is the most appropriate framework for offering education? • Suggestion for reforming the current system

7. Free Market for K-12: Demand side • No public schools and no regulation requiring school attendance • Value placed on education: • Additional earning to the individual as a result of extending education • Better decision making • Interpersonal relationships • Pure satisfaction from learning

8. Free Market for K-12: Supply Side • On the supply side we assume: • The market is perfectly competitive • No externalities in production (MSC=MPC) • Constant marginal cost

9. $5,000 Demand Market for K-12 $ Supply (MC) Q equilibrium Quantity 0

10. Externalities from Education • Positive externalities in consumption: the benefits from education spill over to a third party • Positive externalities from: • More rapid economic growth • Better functioning democratic process • Better safety and hygiene • Greater charitable contribution • Better decision making and more efficient functioning of markets

11. Externalities From Education Consumer 1 1 1 1 10 Marginal social benefit > Marginal private benefit

12. Magnitude of Spillovers • Evidence: The absolute size of the positive externality declines as a student progresses through K-12 education. What does that imply about the shape of the MSB curve?

13. MSB 1 $5,000 Demand Externalities From Education $ • The spillover effect is relatively small. • The MSB is given by MSB1 • The market for education is efficient Supply (MC) Q equilibrium Quantity 0

14. MSB 2 $5,000 Demand Externalities From Education $ • The spillover effect is relatively large. • The MSB is given by MSB2 • The market for education is inefficient Supply (MC) Q equilibrium Q optimal Quantity 0

15. MSB 1 Demand Externalities From Education $ A subsidy of $1000 Supply (MC) $5,000 Supply (MC) with the subsidy $4,000 Q equilibrium Q optimal Quantity 0

16. Rationale for government provision • Does the need to ensure the provision of quality education justify government intervention? • No • Absent any information problems, the market provides high quality education if there is enough demand for it.

17. Rationale for government provision • Do the positive externalities from education justify government intervention? • Yes • A subsidy that equates the MSB with the marginal cost can correct the market failure • However, the existence of the externality does not necessitate public provision of education

18. Rationale for government provision • Does the need for Social and Cultural Cohesion justify government provision? • Yes • US population is very diverse • The need to share common experience to avoid breaking apart along those differences • K-12 system as a melting pot • Builds a shared moral framework that holds society

19. Rationale for government provision • Does the need for Social and Cultural Cohesion justify government intervention? A private education market will lead to • Schools that do not necessarily perpetuate important cultural values, e.g., tolerance, equality • Provision of a differentiated product: schools distinguished by a cultural, racial or religious character • Segregation: schools have children with similar backgrounds • Unequal opportunity for success as high income families have more options.

20. Education Crisis? • Output of Education System: • Scores • Cultural and ethical values • Hard to measure the education output

21. Public provision of education in the US • Locally provided: • Taxes imposed on property in a neighborhood • Funds schools for residents • Neighborhoods vary in tax rates and thus spending on education

22. Problems of the current K-12 system • Excessive centralization • Bureaucracy • Lack of effective parental input • Lack of competition

23. Education Production Function • Achievement = f (H, P, T, S) • H: Home environment • P: Peer group • T: Teachers • S: Class size • Externalities from the peer group • Favorable peers are smart, motivated, not disruptive • Evidence that low achievers have the most to gain • Evidence that peer effects most important for grades 5-12

24. Solutions • School Choice and Vouchers • Problems: cream skimming, more segregation • Performance Standards: e.g., NCLB • Punish schools that do not reach target proficiency • Problems: incentives to change standard, diminishing marginal improvement to school effort, ignores education production function and other factors that are influential • School Resources: e.g., smaller class size • Effective, but do gains justify costs?

25. Segregation in Schools • While education is publicly provided in the US, still there is some degree of segregation by race and income • Inner city schools • Achievement gap • Lawsuits e.g., Sheff vs. O’Neil • Different solutions, e.g., magnet schools