PA 318- Advanced Public Finance and Corporate Management
Education
Lara Thea L. Endaya
Education Crisis at a Glance
•Equitable access to quality education remains elusive throughout the years of formal
education. In 2019, while 82.4% of Filipinos aged 25 and over have reported completing
primary education, completion rate for secondary education significantly drops to 30.5%
for the said cohort. Completion rate for a Bachelor's or equivalent degree decreases even
further to 24.4%.
•Additionally, while 49% of the richest decile attend higher education, only 17% from the
poorest decile can do so.
•An average Filipino student spent more time in school but was less productive than their
counterparts in comparator countries
•The enrollment rate in Philippine higher education is on par with middle-income
countries' average. This is, however, rapidly eroding as neighboring countries continue to
rise while the country's enrollment rate has stagnated
•In the 2018 PISA, The Philippines ranked last among 79 participating countries and
economies in reading and second to last in science and mathematics. At least 78% of
students in the Philippines failed to reach minimum levels of proficiency in each of the
three PISA subjects.
•19% achieved the minimum proficiency level of Overall Reading Literacy.
•19% achieved the minimum proficiency level of Overall Math Literacy, Level 2 or higher.
22% of students attained Level 2 or higher in Science.
•The low share of 15-year-olds represented in PISA reflects a large proportion of school
leavers and out-of-school youth in the country.
Why Should the Government Be Involved in
Education?
Education is not a pure public good because it does not meet the conditions of non-rivalry
(that my consumption of the good does not reduce your enjoyment of the good) and non-
excludability (I cannot deny you the opportunity to consume or access the good).
Education is clearly a rival good: having more children in a classroom may lower the
quality of classroom instruction. Education is clearly also to some extent excludable:
private schools can decide which students to accept.
Public Benefits (Positive Externalities) to Education
Productivity
If a higher level of education makes a person a more productive worker, then society can
benefit from education in terms of the higher standard of living that comes with increased
productivity.
However, this higher standard of living is not an externality if the worker is the only one
who reaps the benefits from his or her higher productivity.
Public Benefits (Positive Externalities) to Education
Productivity
The first is “spillovers” to other workers: Sofia’s increased productivity could raise the
productivity of her coworkers, thus raising their wages and well-being. Because Sofia
herself is unlikely to be fully compensated for the rise in her coworkers’ wages, this is a
positive externality to her coworkers from her education. The second is through taxes: if
Sofia’s higher productivity is reflected in higher pay, then the government collects more
tax revenues as a result
Public Benefits (Positive Externalities) to Education
Citizenship
Education may make citizens more informed and active voters, which will have positive
benefits for other citizens through improving the quality of the democratic process.
Education may also reduce the likelihood that people turn to a life of crime, an outcome
that has positive benefits for other citizens by improving their safety and reducing the
public costs of policing.
Public Benefits (Positive Externalities) to Education
Credit Market Failures
In principle, the family could borrow against the child’s future labor earnings to
finance the education. Yet, in practice, banks and other lenders are unlikely to make
such loans because there is no source of collateral (assets owned by a person that
the bank can claim if the person doesn’t pay back the loan). If the family takes a loan
to finance a home purchase (a mortgage), the collateral is their house; if they don’t
repay the loan, the bank can claim their house to offset its losses. Because the bank
cannot claim the family’s child if they don’t repay the loan, banks may be unwilling
to lend for education; after all, despite the family’s claims, the bank can’t really tell if
their child is a good investment or not.
Educational credit market failure: the credit market has failed to make a loan that
would raise total social surplus by financing productive education.
Public Benefits (Positive Externalities) to Education
Credit Market Failures
The government can address this credit market failure by making loans available to
families to finance education. Yet the government in the United States and the
governments of most industrialized nations do not play this role except in financing
higher education. Instead of providing loans to finance elementary and secondary
education, the government directly provides a fixed level of publicly funded
education.
Public Benefits (Positive Externalities) to Education
Failure to Maximize Family Utility
The reason governments may feel that loans are not a satisfactory solution to credit
market failures is that they are concerned that parents would still not choose
appropriate levels of education for their children.
Even if total family utility would rise with a more highly educated child, some
parents may not be willing to reduce their consumption to finance their children’s
education because they care more about their own consumption than their
children’s future income.
Public Benefits (Positive Externalities) to Education
Redistribution
In a privately financed education model, as long as education is a normal good
(demand for which rises with income), higher-income families would provide more
education for their children than would lower-income families. Because more
education translates to higher incomes later in life, this situation would limit income
mobility because children of high-income parents would have the best
opportunities.
Income mobility, whereby low income people have a chance to raise their incomes,
has long been a stated goal for most democratic societies, and public education
provides a level playing field that promotes income mobility
How Is the Government Involved in
Education?
Two alternative means for governments to deal with positive externalities:
• price mechanism approach is to offer discounts on private educational costs to
students
• quantity mechanism approach is to mandate that individuals obtain a certain level of
education.
How Is the Government Involved in Education?
Free Public Education and Crowding Out
Education is a public good that is provided to some extent by the private sector. As such,
an important problem with the system of public education provision is that it may crowd
out private education provision. Indeed, as economist Sam Peltzman argued in 1973 , it is
possible that providing a fixed amount of public education can actually lower
educational attainment in society through inducing choice of lower-quality public
schools over higher-quality private schools.
How Is the Government Involved in Education?
Solving the Crowd-Out Problem: Vouchers
One solution to the crowd-out problem is the use of educational vouchers , whereby
parents are given a credit of a certain value (e.g., the average spending on a child of a
given age in the public education system) that can be used toward the cost of tuition at
any type of school, public or private.
How Is the Government Involved in Education?
How Is the Government Involved in Education?
Consumer Sovereignty
The first argument in favor of vouchers is that they allow individuals to more closely
match their educational choices with their tastes. By forcing individuals either to choose
free public education or to forgo this large public subsidy and choose private education,
today’s system does not allow people to maximize their utility by freely choosing the
option that makes them best off. This restriction has the unintended consequence of
crowd-out that could be solved with vouchers.
How Is the Government Involved in Education?
Competition
The second argument in favor of vouchers is that they will allow the education market to
benefit from the competitive pressures that make private markets function efficiently.
Critics contend that the public education sector is rife with inefficiency. They point to the
fact that per-pupil spending has more than doubled since 1970, yet the math and
reading scores of twelfth graders have risen by only about 2% over that same time
period. Furthermore, the number of administrative staff in public schools has grown by
91% since 1970, while the number of enrolled students has grown by only 9%.
Vouchers May Lead to Excessive
Problems with Educational Vouchers
School Specialization
The first argument made here for vouchers, that schools will tailor themselves to meet
individual tastes, threatens to undercut the benefits of a common program.
This problem could be dealt with through regulations that require all schools to provide
a certain set of common skills. These regulations could also be supported by testing
regimes to ensure that students at each school are maintaining an acceptable level of
achievement in basic skills.
Vouchers May Increase School
Problems with Educational Vouchers
Segregation
Critics of voucher systems argue that vouchers have the potential to reintroduce
segregation along many dimensions, such as race, income, or child ability. These critics
envision a world where children of motivated parents move to higher-quality private
schools, while children of disinterested or uninformed parents end up in low-quality
public schools. If the children of interested [Link] motivated parents differ along the lines
of race or income from those of uninterested and unmotivated parents, segregation
could worsen.
Vouchers May Increase School
Problems with Educational Vouchers
Segregation
Supporters of vouchers note that, in fact, vouchers may serve to reduce the natural
segregation that already exists in our educational system. Currently, students are
trapped by the monopoly that their local school system has over education production.
Vouchers allow motivated students and their parents to choose a better education and
end the segregation imposed on them by location.
Vouchers May Increase School
Problems with Educational Vouchers
Segregation
At the same time, vouchers might increase segregation by student skill level or
motivation. As the motivated and high-skilled students flee poor-quality public schools
for higher-quality private schools, the students left behind will be in groups that are of
lower motivation and skill. That is, school choice is likely to reduce segregation along
some dimensions (e.g., by allowing students with greater ability and motivation at high-
poverty schools to mix more with students at higher-quality schools) but increase it
along others (e.g., by separating the education system into higher- and lower-
ability/motivation schools).
Vouchers May Be an Inefficient and
Problems with Educational Vouchers
Inequitable Use of Public Resources
Education is financed mostly by local property taxes and state taxes. If the current
financing were replaced by vouchers, total public-sector costs would rise because the
government would pay a portion of the private school costs that students and their
families are currently paying themselves.
Vouchers May Be an Inefficient and
Problems with Educational Vouchers
Inequitable Use of Public Resources
First, such a program would target resources to groups who are most likely to use them
to increase educational attainment. Second, it would reduce the inequity of a system that
mostly benefits higher-income private school attendees. Finally, to the extent that
lower-income children are “left behind” in public schools by their higher-ability and
more motivated peers, it would provide resources for the remaining public schools to
succeed (because income-targeted vouchers would provide higher levels of funding to
low-income schools through their larger voucher amounts).
The Education Market May Not Be
Competitive
Education market is described more closely by a model of natural monopoly, in which
there are efficiency gains to having only one monopoly provider of the good. Economies
of scale in the provision of education mean that it may not be efficient to have many
small schools competing with one another for students; it may be much more (naturally)
efficient to have one monopoly provider instead.
The Education Market May Not Be
Competitive
Given these problems, it is unlikely that the government would actually allow certain
schools to go out of business and leave local students without educational options. Yet
if schools know that they are “too important to fail,” the competitive pressure on the
schools would be mitigated: Why should a school work hard to improve its efficiency if it
knows it will retain its funding regardless of performance? Thus, there is a tension
between government efforts to ensure educational opportunities for all and the ability of
the educational market to put pressure on underperforming schools.
The Costs of Special Education
Children with diagnosed disabilities, for example, have much higher costs associated
with their need for special education , and programs for educating disabled children
require extra resources (such as trained teachers, smaller classes, or special equipment).
The government could address this problem by making the voucher amount for any
child match the cost of educating that child. Children with special education needs who
cost more to educate could receive larger voucher amounts to offset the extra costs
associated with educating them. Because it is very hard to adjust voucher amounts for
the specific educational needs of each child, however, this potential problem with
vouchers will remain.
Evidence on Competition in Education Markets
Direct Experience with Vouchers
Several small-scale voucher programs have been put in place in the United States in
recent years, with mixed evidence on their effectiveness. Studies of larger-scale
voucher programs in other nations have suggested more positive effects. These effects
might be much larger with widespread adoption of vouchers, which would put
competitive pressure on all schools to improve their performance.
Evidence on Competition in Education Markets
Experience with Public School Choice
Some school districts have not offered vouchers for private schools but have instead
allowed students to choose freely among public schools. In some cases, students are
allowed to choose any local school, not just the one nearest them.
Other possible choices for public school include magnet schools , special public
schools set up to attract talented students or students interested in a particular subject
or teaching style, and charter schools , small, independent public schools that are not
subject to many of the regulations imposed on traditional public schools, including
restrictions on teacher qualifications.
Evidence on Competition in Education Markets
Experience with Public School
Incentives
Making schools accountable for student performance can provide incentives for schools
to increase the quality of the education they offer. By some measures, accountability
requirements have had this intended effect. Several studies have found that
implementing strong accountability programs have led to improvements in test scores.
Evidence on Competition in Education Markets
Experience with Public School
Incentives
At the same time, accountability programs can have two unintended effects. First, they
can lead schools and teachers to “teach to the test”—that is, to narrowly focus their
teaching on enabling students to perform well on the test that determines school
accountability, not on a broadly improved education.
A second unintended effect of accountability programs is that schools can manipulate
the pool of test takers and the conditions under which they take tests to maximize
success.
Evidence on Competition in Education Markets
Bottom Line on Vouchers and School
Choice
While the evidence reviewed in this section is mixed, it suggests that an increase in
school accountability, in school choice (in particular, through charter schools), and in the
use of vouchers may improve student outcomes. Yet voucher systems raise serious
concerns about equitable treatment of the students who might get left behind as their
higher-ability, higher motivation friends move on to better schools. Some sort of
guarantee of educational access must be provided to ensure that every student has the
option of at least one educational alternative, even if this reduces the pressure of
competition on schools that will not be allowed to fail.
Measuring the Returns to Education
Effects of Education Levels on
Productivity
The topic that has received the most attention from economists studying education is
the effect of education on worker. The typical view of education is that it raises
productivity by improving worker skills. Just as firms invest in physical capital, education
is the individual’s means of investing in human capital . More education raises a worker’s
stock of skills and allows the individual to earn more in the labor market. productivity. In
a competitive labor market, workers’ wages equal their marginal product, so wages are
typically used as a proxy for productivity. The idea of these studies is to let the market
reveal whether education has raised productivity: if individuals are more productive as a
result of being more highly educated, then firms should be willing to pay more to
employ them.
Measuring the Returns to Education
Education as Human Capital
Accumulation
The typical view of education is that it raises productivity by improving worker skills. Just
as firms invest in physical capital, education is the individual’s means of investing in
human capital. More education raises a worker’s stock of skills and allows the individual
to earn more in the labor market.
Measuring the Returns to Education
Education as a Screening Device
In the screening model, education acts only to provide a means of separating high-
ability people from low-ability people and does not actually improve skills. In this model,
more highly educated workers would be more productive and have higher wages, but it
would not be because education has improved their human capital. Rather, it would be
because only those who turn out to be the most productive workers have the ability to
pursue higher levels of education, so the very fact of having more education has
signaled their high ability (and productivity). The school system in this model is not
adding any value in terms of raising productivity; its only value is in screening for the
most able and productive workers, who can obtain the most education.
Policy Implications
The human capital and screening models may have the same prediction for the
correlation between wages and education, but they result in very different
recommendations for government policy. Under the human capital model, government
would want to support education or at least provide loans to individuals so that they can
get more education and raise their productivity. Under the screening model, however,
the government would not want to support more education for any given individual. In
this model, the returns to education are purely private, not social. Higher education
serves as a signal that a person is more productive, but it does not improve social
productivity at all. In fact, by getting more education, a given worker exerts a negative
externality on all other educated workers by lowering the value of their education in the
labor market.
The Role of the Government in Higher
Education
Current Government: Role The U.S. government currently intervenes in the higher
education sector through four channels.
• 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.
• 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.
The Role of the Government in Higher
Education
• Loans- The federal government also makes loans available to students for higher
education expenditures through the direct student loan program.
• Tax Relief- The final way in which the government finances higher education is
through a series of tax breaks for college-goers and their families.
What Is the Market Failure, and How
Should It Be Addressed?
The major arguments for government intervention in higher education are twofold. The
first is public returns. There is significant evidence of public returns from higher
education; many of the studies cited above about positive returns to education apply to
higher as well as lower educational attainment (such as studies of improved health or
productivity spillovers). And there is a large literature showing that the publicly financed
research that is carried out at universities is critical for innovation and economic growth.
The second is failures in the credit market for student loans.
Conclusion
The provision of education, an impure public good, is one of the most important
governmental functions in the United States and in countries around the world. Because
of external returns, market failures, or redistribution, governments have traditionally
decided to be the majority providers of educational services. In this chapter, we learned
that one cost of the government role can be a reduction in the level of educational
attainment of children. Voucher systems can address this problem, but they raise a host
of additional issues about segregation and the feasibility of private educational markets.
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. A large literature suggests sizeable private returns to education, with some
evidence of public returns as well.
