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THE ECONOMICS OF K-12 EDUCATION
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CHAPTER OUTLINE
Investments in Human Capital
Should We Spend More?
School Reform Issues
Summary
LEARNING OBJECTIVES
LO1: Analyze education as an investment and as one that not only pays dividends to the person getting the
education, but also positively affects society at large.
LO2: Summarize the debate over whether spending more on education will yield more significant returns.
LO3: Summarize the economics behind the school reform issues.
LO4: Describe why many economists argue that the current structure of education prevents more money from
doing any good.
KEY TERMS
Human capital- The ability of a person to create goods and services.
Net present value- The difference between the present value of benefits and the present value of costs.
External benefits- Benefits that accrue to someone other than the consumer or producer of the good or service.
DISCUSSION QUESTIONS
1. What is human capital? What is an example of something that would develop human capital?
2. What is the net present value?
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3. How do you determine if an investment in human capital is a wise investment? Apply this concept to
education.
4. What is an external benefit? If there is an external benefit in a market, will the free market equilibrium yield
an optimal solution?
5. What are the external benefits associated with education? What should the government do to bring about an
optimal solution?
6. After adjusting for inflation, how have expenditures per student changed over the last 40 years? What impact
has this had on the students?
7. Summarize Hanushek’s theory on the value of additional spending on public schools.
8. Why is it so difficult to measure the impact of school vouchers on student achievements?
THE WEB-BASED QUESTION
American students have been involved in a global study, the Trends in International Mathematics and Science
Study (TIMSS). Data have been collected in 1995, 1999, 2003, 2007, and 2011 and the next scheduled collection
date is 2015. This study allows us to compare the performances of fourth- and eighth-grade American students
with the scores of students from countries throughout the world. The 2011 results are listed at the National Center
for Education Statistics (NCES) website: http://nces.ed.gov/timss. The tables at the website list the average
scores for 57 countries and use shading to indicate the countries where the students did significantly better or
significantly worse than the students from the United States.
Locate Table 3 with eighth-grade math scores (http://nces.ed.gov/timss/table11_3.asp) and Table 5 with eighthgrade science scores (http://nces.ed.gov/timss/table11_5.asp) at the website. How do American students compare
with students from the other countries and with the overall international average?
List the average math and science scores for the following seventeen selected nations: Australia, Chile, Hungary,
Iran, Israel, Italy, Japan, Korea, Saudi Arabia, New Zealand, Thailand, Russia, Norway, Ukraine, Singapore,
Ghana, Sweden, and the United States. Use the average scores in mathematics and science to rank the counties by
student performance listing the countries in ranked order from highest to lowest in the table below. How do the
U.S. students compare with the students from the other sixteen countries?
AVERAGE MATHEMATICS AND SCIENCE ACHIEVEMENT OF
EIGHTH-GRADE STUDENTS BY NATION: 2011
Mathematics
Country
Science
National Average
Country
National Average
Education
International Average
of 56 Nations
International Average
of 56 Nations
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ANSWERS TO STUDY QUESTIONS
SUGGESTED ANSWERS TO THE DISCUSSION QUESTIONS
1. Human capital is the ability of a person to create goods and services. Education and on-the-job training are
examples of investment, which would develop human capital.
2. First, one needs to estimate the present value of all current and future benefits as well as the present value of
all current and future costs. Then, the net present value can be estimated by taking the difference between the
sum of the present value of all benefits and the sum of the present value of all costs.
3. An investment in human capital is a wise investment, if the net present value is positive. The present value of
the benefits must be greater than the present value of the costs.
Education would be a wise investment in human capital, if the net present value were positive. This means
that the present value of the increased earnings potential would be greater than the present value of the cost of
education. For working parents, the costs to consider would be the difference between tuition and the costs of
daycare.
4. An external benefit is the benefit that accrues to someone other than the consumer or the producer of the good
or service.
If there is an external benefit in a market, the free market equilibrium will not yield an optimal solution. At
the market equilibrium, the buyer equates the private personal benefit with the price (the cost of the item).
The benefit to society includes the private benefit to the individual plus the external benefit. The social benefit
is thus greater than the cost at the equilibrium, so that society would be better off with more of this product.
The quantity of output will be less than optimal.
5. There are external benefits to society associated with education. Educated people commit less crime, are less
likely to be on welfare, and pay more in taxes. Children in school also learn to get along with people from
different backgrounds. To bring about an optimal solution, the government should subsidize education. Given
large external benefits from education, the optimal price is zero and the optimal output would be all students.
6. After adjusting for inflation, expenditures per student over the last 40 years have more than tripled. Using
constant 2001 dollars, spending per pupil has increased from $2,275 per student in 1960 to $8,203 in 2002.
Some of the increased expenditure was used to pay for non-instructional expenses and special education,
which did not affect the classroom of the non-special education student.
During the last 40 years, the average class size has decreased from 26 students per class to 16 for the overall
average and to 19.5 for the non-special education students. High-school graduation rates have increased
dramatically. SAT scores have declined through the 1960s and 1970s, and they have only partially rebounded.
Since the pool of students taking the SATs has expanded, it is difficult to interpret these results.
7. Hanushek theorizes that additional spending on public schools brings about improved test scores, but with
diminishing returns. After a certain point, additional spending brings about smaller and smaller improvement
in the scores of students. When the overall spending was low, additional spending brought about a significant
improvement in test scores. However, now with the spending per pupil at a higher level, the additional
spending is not generating any measurable advancement in the student performance level.
Education
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8. It is difficult to measure the impact of school vouchers on student achievement because parents who show an
interest in getting their children out of failing public schools are likely to nurture their children in either
setting. Thus, success in charter schools using school vouchers may be due to the motivation of parents rather
than the effectiveness of the voucher system.
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SUGGESTED ANSWER TO THE WEB-BASED QUESTION
The American students performed well above the 45-country average for both subjects. Of the seventeen selected
nations listed in the table below, the eighth graders from the United States ranked eighth in mathematics and sixth
in science. Although American students did well in comparison to the international average, they were
significantly outperformed in mathematics by students from five of the selected seventeen countries and by
students from four countries in science. However, American students did significantly better than students did
from five of the seventeen countries in mathematics and from eight of the seventeen countries in science.
AVERAGE MATHEMATICS AND SCIENCE ACHIEVEMENT OF
EIGHTH-GRADE STUDENTS BY NATION: 2011
Mathematics
Country
Korea
Singapore
Japan
Russian Federation
Israel
United States
Hungary
Australia
Italy
New Zealand
Ukraine
Norway
Thailand
Chile
Iran, Islamic Republic of
Saudi Arabia
Ghana
International average
of 45 nations
Science
National Average
613
611
570
539
516
509
505
505
498
498
496
494
484
411
387
378
264
500
Country
Singapore
Korea, Republic of
Japan
Russian Federation
United States
Hungary
Australia
Israel
New Zealand
Italy
Ukraine
Norway
Iran, Islamic Republic of
Chile
Saudi Arabia
Thailand
Ghana
International average
of 45 nations
National Average
590
560
558
542
525
522
519
516
512
501
501
494
474
461
436
306
500
Country’s average is significantly higher than the U.S. average.
Country’s average is not significantly different from the U.S. average.
Country’s average is significantly lower than the U.S. average.
SOURCE: International Association for the Evaluation of Educational Achievement (IEA), Trends in
International Mathematics and Science Study (TIMSS), 2011.