EDUCATION as a source of market failure
Source of market failure for education: Externalities
Education is deemed as a merit good by the government that has positive externality in
consumption: benefits experienced by society but not by consumers/students themselves
and not accounted for by the price mechanism
• PMB: benefit to individual from additional years of education: employment, higher wages,
social mobility etc
• SMB: benefit to society/third parties from additional years of education: a more skilled
population would attract FDIs which will encourage economic growth
In a perfectly competitive market, the equilibrium outcome will be at Q* where PMB=PMC.
However, due to positive externality, the actual benefit to society is represented by SMB
which takes into account full benefit to society of additional years of education. SMB lies
above EMB and hence, the efficient output should be at Q’ where SMC=SMB. This leads to
underconsumption of Q*-Q’. DWL also occurs without government intervention.
Source of market failure for education: Imperfect Information
Consumers may well underestimate the long term private benefits from investing time and
money into extra education
Incomplete Information
Misconception that the education system is more tailored towards creating people who
want to be rewarded with capitalistic benefits detached from society rather than thinking
individuals that can improve the lives of others around them.
Ignorance of benefits to oneself leading to underconsumption
Ignore the benefits that education brings to oneself, such as skills learned leading to a wider
variety of job scope and jobs with higher pay etc.
Cost/Benefit
PMBactual
PMBperceived
If consumers are ignorant of the benefits to oneself of having education, the perceived
benefits is lower than the actual benefits and consumption will only be at Q1. The red
triangle marks the welfare loss.
Ignorance of benefits to third parties leading to underconsumption
Unaware of the benefits that education might bring to others such as when requested for
help in a certain area of skill or to the productive force.
(Diagram similar to positive externality above)
In a perfectly competitive market, the equilibrium outcome will be at Q* where PMB=PMC
since only private benefits and costs are considered as consumers are unaware of the
benefits to others. With the ignorance of the benefits to third parties, there is a divergence
of RMB between SMB and PMB, with SMB greater than PMB. This leads to
underconsumption of Q*-Q’. DWL also occurs without government intervention.
Solutions: Government intervention
Non-Market based solutions: Legislation
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Compulsory 6 years basic education to encourage parents to send their children to school
Link to POSITIVE EXTERNALITY: Mandatory consumption of education prevents
underconsumption below socially efficient levels, allocating resources efficiently for
education as a merit good.
Non-Market based solutions: Regulation
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Information about skills upgrading workshops are made available through various
pamphlets or brochures given out or advertisements
Link to IMPERFECT INFORMATION: Citizens in the workforce will be will be more aware
of the full social benefits of education to themselves as well as to society at large. Hence,
there can be a more accurate assessment of PMB and thus moving PMBperceived to
PMBactual. The awareness of factoring in EMB in decision making also moves the
equilibrium closer to that of the socially optimum level.
Non-Market based solutions: Educate people about importance of education
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With little natural resources in Singapore, human resource that is essentially a skilled
workforce is the most important resource Singapore owns. Thus, in Singapore, there is
heavy emphasis put upon education where education is seen as the only route to better
employment, higher wages, social mobility and better future. As Lee Kuan Yew once said,
“Education is the only way up”. Hence, the importance of education has been constantly
instilled in minds of students and parents to encourage more students to further their
education in Singapore. Thus, the importance of education has been successfully
entrenched in minds of Singaporeans where most strive hard in this competitive
environment to excel in academics.
Link to IMPERFECT INFORMATION: Students and parents will be more aware of the full
social benefits of education to themselves as well as to society at large. Hence, there can
be a more accurate assessment of PMB and thus moving PMBperceived to PMBactual. The
awareness of factoring in EMB in decision making also moves the equilibrium closer to
that of the socially optimum level.
Market-based solutions: Funding and subsidies
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Financial Assistance Schemes
Bursary schemes
Tuition Grant Scheme (TGS) was introduced by the Government to subsidise the high cost
of tertiary education
Scholarships for tertiary education
o A* science and research scholarships
o PSC scholarship
o SAF scholarship
 Fixed quantity subsidies in NTU/SMU/NUS
 Link to POSITIVE EXTERNALITY: subsidies help to lower the costs of the consumers. As
SMB is greater than PMB, a subsidy equivalent to the EMB at socially efficient output
level, QSE would shift the PMC curve vertically down by that amount PMC'= PMCsubsidy. Therefore, the consumption of education would increase.
 Link to IMPERFECT INFORMATION: to encourage allocation of more resources to the
provision of education to account for EMB that otherwise would not be taken into
consideration by students due to ignorance, the Singapore government can provide
subsidies to schools. Hence, this will lower the unit cost of production and provide an
incentive for schools to increase the education services provided. As SMB > PMB, a
subsidy equivalent to the EMB at QSE would shift the PMC curve vertically down by
PMC'=PMC-subsidy. Therefore, the government can increase the number of people
having education with the provision of subsidies.
Evaluation of government solutions:
Subsidies at tertiary level
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Like all forms of subsidies, a fixed quantity subsidy will cause consumption of university
education to increase. If it is indeed true that university education has positive
externalities, this is the result that we want.
However, this subsidy method distorts efficiency in two ways: at the consumer level and
at the provider level. All subsidies distort consumer preferences. More specifically, this
method of subsidy raises the opportunity cost of overseas education since you lose much
more in terms of other goods if you either ignore or fail to get the subsidy and choose to
pay for your education abroad. The presence of the subsidy means that, to a large extent,
most Singaporeans will not consider overseas education. Thus, subsidies create a form of
captive market for local universities. As a result, these universities may run into Xinefficiency problems.
Even though there are subsidies at tertiary level, amount of subsidies given are still
limited. Hence, tertiary fees are still expensive, deterring students from continuing their
studies.
BUT subsidies are still preferred to be used as it permits the markets to operate and
ensures that benefits are passed to consumers. It can also be adjusted in response to the
magnitude of the problem.
Education
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Education is a long drawn process that involves changing mindset. Even though the
government might put in effort to promote education, some youths might still not
consider furthering their studies and some workers might still refuse to continue
upgrading themselves.
General limitations
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Lack of information: Government may not know the exact costs of education and the
amount to subsidize as there are often many miscellaneous fees other than the school
fees (e.g. fees for notes which could be substantial in the long run)