Financing Education
in a
Climate of Change
10th edition
Vern Brimley, Jr. & Rulon R. Garfield
Power Point Presentation: Lora Knutson, Ph.D.
This multimedia product and its contents are protected under copyright law.
The following are prohibited by law: any public performance or display, including transmission of any image over
a network; preparation of any derivative work, including the extraction, in whole or in part,
of any images; any rental, lease, or lending of the program.
Copyright © Allyn & Bacon 2008
Chapter 1
The Economics of Education
This multimedia product and its contents are protected under copyright law.
The following are prohibited by law: any public performance or display, including transmission of any image over
a network; preparation of any derivative work, including the extraction, in whole or in part,
of any images; any rental, lease, or lending of the program.
Copyright © Allyn & Bacon 2008
Education as Human Capital
•Education = Investment in human capital & Investment = Risk
•Education is responsible for social and economic development
•Capital deteriorates with inactivity
Copyright © Allyn & Bacon 2008
Creation of Wealth and Education
•Elements in the creation of wealth (labor, physical capital,
technology), are enhanced through education
•Educated workers are more productive
•All areas of resources are refined through education
•Human capital—greater productivity in management
Human Capital
Public sector
Private sector
Education
•Copyright © Allyn & Bacon 2008
Education: An Important Industry
•Education is the country’s largest industry
•There is a positive relationship between education and economic growth
•Economic philosophies affect fiscal matters and the educational program
Marx
Keynes
Galbraith
Friedman
Smith
Communist
Government
Intervention
Liberal
Conservative
Capitalist
Copyright © Allyn & Bacon 2008
A Public Sector Responsibility
•Government through taxation produces education services
•Private sector organizations respond to consumer demand
•Education--a political responsibility at three levels of government
through taxation
•Federal system-public education designed to produce equity
Private sector
$$$
Public sector
Taxation
Copyright © Allyn & Bacon 2008
•Low end—human effort devoted to essential material goods
•High end—human effort devoted to education and nonessential goods
and services
•As educational services increases, economic productivity and wealth
increases
•Educational system—result and determinant of social and economic
progress
•Education produces nonfree services
producer’s good—human capital
consumer’s good—purchaser of education and wants as a
consumer
Copyright © Allyn & Bacon 2008
Stimulates Economic Growth
•Education is important to increases in economic productivity
•The scope of educational services are determined by
government officials
voters’ experiences
school community
taxpayers
those with no direct relationship to education interest group
Copyright © Allyn & Bacon 2008
•Marginal dollar principle
marginal utility—pleasure or satisfaction consumer achieves
diminishing marginal utility—utility of additional units of a
good services decreases as additional units consumed
marginal dollar—dollars better spent for some other goods or
services
•Point of diminishing returns
additional expenditures yield very little or no additional
educational returns
Copyright © Allyn & Bacon 2008
Economic Benefits of Education
•Benefits
range of job opportunities
job security
taxes paid to state
life expectancy
averages earnings
Copyright © Allyn & Bacon 2008
•Increasing expenditures and the economy
human capital more important than natural resources in
wealth creation
high education development overcomes lack of natural
resources
poor education system—lower individual economic
productivity
•Expenditures benefit individuals and society
social mobility, higher status, increased appreciation for arts
and culture, increased participation in democratic
process
family, neighborhood, business, society and culture benefit
Copyright © Allyn & Bacon 2008
Noneconomic Benefits of Education
•Free democratic society—well-informed and responsible citizens
•Schools--source of moral and ethical values
•Preservation of nation’s culture and people’s sense of identify
•External benefits—justify taxation to finance education
healthier society
more informed electorate
more productive labor force
raised standard of living
enhanced economic growth
Copyright © Allyn & Bacon 2008
•Exclusion or free rider principle
exclusion principle—ability of consumer to enjoy exclusively
a good or service
free riders—garnering benefits without spending income
•Externalities justify ability principle
costs of education paid by all, based on ability to pay
wealthier pay more
Copyright © Allyn & Bacon 2008
Taxation and Education
•Benefit system—tax based on benefits received
•Ability principle—taxes based on ability to pay
Copyright © Allyn & Bacon 2008
Cost-Quality Relationship to Education
•Problems with establishing this relationship
lack a definition of high quality that is measurable and
acceptable to all concerned
goals of education vary from time to time and place to place
•Research limitations
many variables contribute to student achievement, not just
spending
Copyright © Allyn & Bacon 2008