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6E:119
Policy Analysis
Fall, 2012
Chapter 11 Education
Materials in these slides were drawn heavilyfromthe textbook Public Finance and Public Policy,
byJ Gruber, Ed. 2, 2007, Worth Publisher, and fromteaching materials supplied with that text.
The Role of Government in Education
Why Should the Government Be Involved in
Education?
How Is the Government Involved in Education?
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Evidence on Competition in Education Markets
Measuring the Returns to Education
The Role of the Government in Higher Education
Conclusion
International Comparison
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Why Should the Government be
Involved in Education?
1. Positive Externalities:
Productivity Workers with more education are more productive.
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Productivity Workers with more education are more productive.
Society benefits from higher standard of living.
Citizenship Education may make citizens more informed and
active voters, thus improving the quality of the democratic
process.
Why Should the Government be
involved in education?
2. Credit Market Failures:
Without government involvement, all education would be private,
and full cost would fall on families.
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Educational credit markets would likely fail.
Loans would necessarily be long term.
Collateral would be human capital, which is hard to monetize.
Much uncertainty about quality/quantity of human capital being
created.
Why Should the Government be
involved in education?
3. Problems with inter-temporal maximization of family utility
Transfer from parents to children
Payments today, benefits tomorrow
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Both issues make choices difficult.
4. Equity Considerations
Education is a normal good more is purchased by higher income
families
Rich benefit most from education, perpetuating income distribution
inequities across generations.
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How Is the Government Involved?
Free Public Education and Crowding Out
An important
problem with
public provision
of education is
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that it may
crowd out
provision of
education by
the private
sector.
Solving the Crowd-Out Problem: Vouchers
educational vouchers A fixed amount of money
givenbythegovernment tofamilieswithschool-
How Is the Government Involved?
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given by the government to families with school
age children, who can spend it at any type of
school, public or private.
How Is the Government Involved?
11 . 2
Solving the Crowd-Out Problem: Vouchers
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How Is the Government Involved?
The Case For Vouchers
1. Consumer Sovereignty
Vouchers allow individuals to more closely match their
d ti l h i ith th i t t
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educational choices with their tastes.
2. Competition
Vouchers promote competition among schools leading to
higher quality and greater efficiency.
How Is the Government Involved?
The Case Against Vouchers
1. They may Lead to Excessive
School Specialization
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Schools may tailor themselves to
meet individual tastes, thus
losing the benefits of a common
program.
Schools could give less attention
to what are viewed as the central
elements of education.
How Is the Government Involved?
The Case Against Vouchers
2. Vouchers may lead to segregation
They have the potential to reintroduce segregation along
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many dimensions, such as race, income, or child ability.
3. Vouchers Are an Inefficient and Inequitable Use
of Public Resources
Total public-sector costs would rise, since the government
would pay a portion of the private school costs that students
and their families are currently paying themselves.
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How Is the Government Involved?
The Case Against Vouchers
4. The Education Market May Not Be Competitive
Arguments for vouchers are based on a perfectly competitive
model of the education market. But that market may be
better described by a model of natural monopoly*
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*A natural monopoly is an industry in which economies of
scale make a single producer the most efficient means of
producing the good.
5. The Costs of Special Education
Voucher amounts are based on average costs. But all
children do not cost the same to educate.
E.g., special education programs to educate disabled
children.
Evidence on Competition in
Education Markets
1. Direct Experience with Vouchers
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There have been several small-scale voucher
programs in the United States in recent years.
Probably the most studied program has been
the one used in Milwaukee.
The Milwaukee Voucher Experiment
Rouse (1998) studied the effect of the Milwaukee voucher
programon the achievement of students who used their
vouchers to finance a move to private schools.
Shenoted that onecannot directly comparestudents who do and do not
usevouchers, sincethey may differ along many dimensions.
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This selectiveuseof vouchers would bias any comparison between the
groups.
Oversubscribed schools had to select randomly fromall applicants,
using alottery.
In the U.S., about 10% of students chose private schools;
in low-income developing countries, 20% to 30%.
Evidence on Competition in
Education Markets
2. Charter Schools and Magnet Schools
Instead of vouchers to cover private school tuition,
some school districts allow students to choose freely among
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public schools.
magnet schools Special public schools set up to attract talented
students or students interested in aparticular subject or teaching style.
charter schools Schoolsfinanced with public funds that arenot
usually under thedirect supervision of local school boards or subject to
all stateregulations for schools.
Evidence on Competition in
Education Markets
3. Experience with Public School Incentives
Making schools accountable for student performance can
provide incentives for schools to increase the quality of the
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education they offer.
Accountability programs can have two unintended effects.
First, they can lead schools and teachers to teach to thetest.
Second, schools can manipulatethepool of test takers and the
conditions under which they taketests to maximizesuccess.
Evidence on Competition in
Education Markets
Bottom Line on Vouchers and School Choice
There is little evidence to support the notion that public
school choice has major beneficial effects on outcomes.
Thereissomeevidencethat vouchersimprovetheacademic
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There is some evidence that vouchers improve the academic
performance of students who move to private schools,
particularly in nations where such systems are widespread.
The United States is currently in a phase of experimentation
with both choice and accountability that will provide further
evidence on the most effective way to improve elementary
and secondary education.
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Measuring the Returns to Education
Effects of Education Levels on
P d ti it
returns to education The benefits that accrue to
society when students get more schooling or when
they get schooling from a higher-quality environment.
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Productivity
A large literature shows
that more education leads to
higher wages.
There is substantial
controversy, however, over
the implications.
Measuring the Returns to Education
Alternative explanations for the positive
correlation between education and wages
Education as Human Capital Accumulation
human capital: A persons stock of skills, which may be
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p p , y
increased by further education.
Education as a Screening Device
screening A model that suggests that education provides only a
means of separating high- fromlow-ability individuals and does
not actually improve skills.
Measuring the Returns to Education
Policy Implications
Under the human capital model, government would want to
support education to raise productivity.
Under the screening model, however, government support
would amount merelyto an income transfer fromthe less able
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would amount merely to an income transfer from the less able
to the more able.
Differentiating the Theories
The evidence indicates that most of the returns to education
reflect accumulation of human capital, although there may be
some screening value as well.
ESTIMATING THE RETURN TO EDUCATION
A simple approach to estimating the return to a year of education is to
compare people with more education (the treatment group) to people
with less education (the control group), but this approach suffers from
bias problems.
Two methods try to control for this bias in estimating the true human
capital effects of education.
The first tries to control directly for underlying ability in a wage regression
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The first tries to control directly for underlying ability in a wage regression
so that any remaining effect of education represents true productivity
effects.
The second is a quasi-experimental study that tries to find treatment and
control groups that are identical except for the amount of schooling they
receive.
Although all of these approaches have some limitations, the result of
the analysis is surprisingly consistent: each year of education raises
wages by 710%.
Measuring the Returns to Education
The externalities of education
A number of studies have shown that higher
levels of education are associated with:
an increased likelihood of participation in the
political process
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political process.
a lower likelihood of criminal activity.
improved health of the people who received
more education and of their children.
higher levels of education of children.
higher rates of productivity of coworkers.
Measuring the Returns to Education
The Impact of School Quality
A number of approaches have been taken to
estimate the impact of school quality on student test
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scores.
Findings suggest that the outcomes of efforts to
improve school quality can be very dependent on
the approach taken to improvements.
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THE EFFECTS OF SCHOOL QUALITY
Two approaches have been used to estimate the
impact of school quality on student outcomes. The first
is using experimental data.
Example: The state of Tennessee implemented Project
STAR in 19851986, randomly assigning 11,000 students
(grades K3) to small classes (1317 students), regular
l (22 25 t d t ) l l ith t h
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classes (2225 students), or regular classes with teachers
aides.
The other approach is a quasi-experimental analysis
of changes in school resources.
Example: By the mid-1990s, California had the largest
class sizes in the nation (29 students per class on average).
The California state government in 1996 provided strong
financial incentives for schools to reduce their class size to
20 students per class.
Government and Higher Education
What Is the Market Failure and How Should
It Be Addressed?
The major market failure in higher education is not
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positive externalities but rather the failure in the
credit market for student loans.
Thus, shifting state resources away from direct
provision and toward loans would likely improve
efficiency.
Government and Higher Education
Current Government Role
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Government and Higher Education
Current Government Role
1. State Provision
The primary form of government financing of higher
education is direct provision of higher education through
locally and state-supported colleges and universities.
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y pp g
2. Pell Grants
The Pell Grant program is a subsidy to higher education
administered by the federal government that provides
grants to low-income families to pay for their educational
expenditures.
Government and Higher Education
Current Government Role
3. Loans
direct student loans -- Loans taken directly from the
Department of Education.
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guaranteed student loans -- Loans taken from private
banks for which the banks are guaranteed repayment by the
government.
For students who qualify on income and asset grounds, the
government subsidizes the loan cost to students by
(a) Guaranteeing a low interest rate.
(b) Allowing students to defer repayment of the loan until they
have graduated.
Government and Higher Education
Current Government Role
4. Tax Relief
The final way in which the government finances
higher education is through a series of tax breaks
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for college-goers and their families.
The four largest tax breaks add up to about $9
billion per year in forgone government revenue.
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Conclusion
The provision of education, an impure public good, is
one of the most important governmental functions in
the United States and around the world.
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The optimal amount of government intervention in
education markets depends on the extent of market
failures in private provision of education and on the
public returns to education.