Public Finance and Public Policy Jonathan
CopyrightGruber
© 2010Third
Worth
Edition
Publishers
Copyright © 2010 Worth Publishers
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11.1 Why Should the
Government Be Involved in
Education?
11.2 How Is the Government
involved in Education?
11.3 Evidence on Competition
in Education Markets
Education
11.4 Measuring the Returns to
Education
11.5 The Role of the
Government in Higher
Education
11.6 Conclusion
PREPARED BY
FERNANDO QUIJANO AND SHELLY TEFFT
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CHAPTER 11 ■ EDUCATION
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11.1
CHAPTER 11 ■ EDUCATION
Why Should the Government Be Involved in Education?
There are a number of public benefits (positive externalities) to
education that might justify a government role in its provision.
Productivity
The first potential externality from education is 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.
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.
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CHAPTER 11 ■ EDUCATION
11.1
Why Should the Government Be Involved in Education?
Credit Market Failures
Another market failure that may justify government intervention is the
inability of families to borrow to finance education.
In a world without government involvement, families would have to
provide the money to buy their children’s education from private schools.
educational credit market failure The
failure of the credit market to make loans
that would raise total social surplus by
financing productive education.
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11.1
CHAPTER 11 ■ EDUCATION
Why Should the Government Be Involved in 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.
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 lowerincome families.
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.
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CHAPTER 11 ■ EDUCATION
11.2
How Is the Government Involved in Education?
Free Public Education and Crowding Out
An important problem with the system of public education provision is
that it may crowd out private education provision.
 FIGURE 11-2
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CHAPTER 11 ■ EDUCATION
11.2
How Is the Government Involved in Education?
Solving the Crowd-Out Problem: Vouchers
educational vouchers A
fixed amount of money given
by the government to families
with school-age children, who
can spend it at any type of
school, public or private.
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CHAPTER 11 ■ EDUCATION
11.2
How Is the Government Involved in Education?
Solving the Crowd-Out Problem: Vouchers
 FIGURE 11-3
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11.2
CHAPTER 11 ■ EDUCATION
How Is the Government Involved in Education?
Solving the Crowd-Out Problem: Vouchers
Consumer Sovereignty
The first argument in favor of vouchers is that vouchers allow individuals
to more closely match their educational choices with their tastes.
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.
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11.2
CHAPTER 11 ■ EDUCATION
How Is the Government Involved in Education?
Problems with Educational Vouchers
Vouchers Will Lead to Excessive 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.
By trying to attract particular market
segments, schools could give less
attention to what are viewed as the
central elements of education.
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11.2
CHAPTER 11 ■ EDUCATION
How Is the Government Involved in Education?
Problems with Educational Vouchers
Vouchers Will Lead to Segregation
Critics of voucher systems argue that vouchers have the potential to
reintroduce segregation along many dimensions, such as race, income,
or child ability.
Vouchers Are an Inefficient and Inequitable Use of
Public Resources
If the current financing were replaced by vouchers, 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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CHAPTER 11 ■ EDUCATION
11.2
How Is the Government Involved in Education?
Problems with Educational Vouchers
The Education Market May Not Be Competitive
The arguments of voucher supporters are based on a perfectly
competitive model of the education market. Yet the 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.
The Costs of Special Education
Each child would be worth a voucher amount that represents the average
cost of educating a child in that town in that grade, but all children do
not cost the same to educate.
special education Programs
to educate disabled children.
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11.3
CHAPTER 11 ■ EDUCATION
Evidence on Competition in Education Markets
Direct Experience with Vouchers
There have been several small-scale voucher programs put in place in
the United States in recent years. Probably the most studied program has
been the one used in Milwaukee.
Studies of this program provide some support for the notion that
vouchers can allow students to improve the quality of their education.
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11.3
CHAPTER 11 ■ EDUCATION
Evidence on Competition in Education Markets
EM P I R I C A L E V I D E N C E
ESTIMATING THE EFFECTS OF VOUCHER PROGRAMS
Rouse (1998) studied the effect of the Milwaukee voucher program on
the achievement of students who used their vouchers to finance a
move to private schools:
 The treatment group saw an increase in academic performance.
 There was a rise in math test scores of 1–2% per year relative
to the control group.
 There was no difference in reading scores across the two
groups.
In the United States, about 10% of students are enrolled in private
schools, a proportion that doubles or triples in the low-income
developing world.
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CHAPTER 11 ■ EDUCATION
11.3
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.
magnet schools Special public
schools set up to attract talented
students or students interested in a
particular subject or teaching style.
charter schools Schools financed
with public funds that are not
usually under the direct supervision
of local school boards or subject to
all state regulations for schools.
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CHAPTER 11 ■ EDUCATION
11.3
Evidence on Competition in Education Markets
Experience with Public School Incentives
Although the United States has limited experience with vouchers and
school choice, it has much larger experience with another aspect of
educational reform: school accountability.
Making schools accountable for student performance can provide
incentives for schools to increase the quality of the education they offer.
Accountability programs can have two unintended effects:
 They can lead schools and teachers to “teach to the test”.
 Schools can manipulate the pool of test takers and the conditions
under which they take tests to maximize success.
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11.3
CHAPTER 11 ■ EDUCATION
Evidence on Competition in Education Markets
Bottom Line on Vouchers and School Choice
There is also little evidence to support the notion that public school
choice has major beneficial effects on outcomes.
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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CHAPTER 11 ■ EDUCATION
11.4
Measuring the Returns to Education
returns to education The
benefits that accrue to society
when students get more schooling
or when they get schooling from a
higher-quality environment.
Effects of Education Levels on Productivity
There is a large literature that shows
that more education leads to higher
wages in the labor market.
There is substantial controversy,
however, over the implications of
this correlation.
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CHAPTER 11 ■ EDUCATION
11.4
Measuring the Returns to Education
Effects of Education Levels on Productivity
Education as Human Capital Accumulation
human capital A person’s stock of
skills, which may be increased by
further education.
Education as a Screening Device
screening A model that suggests
that education provides only a
means of separating high- from
low-ability individuals and does not
actually improve skills.
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11.4
CHAPTER 11 ■ EDUCATION
Measuring the Returns to Education
Effects of Education Levels on Productivity
Policy Implications
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.
Differentiating the Theories
Most of the returns to education reflect accumulation of human capital,
although there may be some screening value to obtaining a high school
or higher education degree.
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11.4
CHAPTER 11 ■ EDUCATION
Measuring the Returns to Education
EM P I R I C A L E V I D E N C E
ESTIMATING THE RETURN TO EDUCATION
AND EVIDENCE FOR SCREENING
A simple approach to estimating the return to a year of education in
terms of higher wages 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 so that any remaining effect of education represents
true productivity effects.
• The other approach to control for bias in estimating the human
capital returns to education has been quasi-experimental studies
that try 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 7–10%.
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CHAPTER 11 ■ EDUCATION
11.4
Measuring the Returns to Education
Effect of Education Levels on Other Outcomes
A number of studies have assessed the impact of increased education on
external benefits. Key findings include the following:
 Higher levels of education are associated with an increased
likelihood of participation in the political process.
 Higher levels of education are associated with a lower likelihood
of criminal activity.
 Higher levels of education are associated with improved health of
the people who received more education and of their children.
 Higher levels of education of parents are associated with higher
levels of education of their children.
 Higher levels of education among workers are associated with
higher rates of productivity of their coworkers.
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11.4
CHAPTER 11 ■ EDUCATION
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 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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CHAPTER 11 ■ EDUCATION
11.4
Measuring the Returns to Education
EM P I R I C A L E V I D E N C E
ESTIMATING THE EFFECTS OF SCHOOL QUALITY
A major focus of research in labor economics is estimating the impact
of school quality on student outcomes.
Two approaches have been used to address this issue. The first is
using experimental data:
Example: The state of Tennessee implemented Project STAR in
1985–1986, randomly assigning 11,000 students (grades K–3) to
small classes (13–17 students), regular classes (22–25
students), or regular classes with teacher’s 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.
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11.5
CHAPTER 11 ■ EDUCATION
The Role of the Government in Higher Education
Current Government Role
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11.5
CHAPTER 11 ■ EDUCATION
The Role of the Government in Higher Education
Current Government Role
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.
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CHAPTER 11 ■ EDUCATION
11.5
The Role of the Government in Higher Education
Current Government Role
Loans
direct student loans Loans taken directly
from the Department of Education.
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.
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11.5
CHAPTER 11 ■ EDUCATION
The Role of the Government in Higher Education
Current Government Role
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.
These tax breaks add up to about $8 billion per year in forgone
government revenue.
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11.5
CHAPTER 11 ■ EDUCATION
The Role of the Government in Higher Education
What Is the Market Failure and How Should It Be Addressed?
The major motivation for government intervention in higher education is
not to produce positive externalities but rather to correct the failure in
the credit market for student loans.
Given that the major market failure for higher education is in credit
markets, shifting state resources away from direct provision and toward
loans would likely improve efficiency.
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11.6
CHAPTER 11 ■ EDUCATION
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.
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.
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