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The Economics of Education Crisis and Reform

6. The Economics of Education Crisis and Reform. Introduction. Effectiveness of the US education system The US education “crisis” Alternative ways of offering education Rationales for government intervention. Effectiveness of K-12 Education. American eighth graders versus the world, 2003.

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The Economics of Education Crisis and Reform

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  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

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