State and Local Government Expenditures
Chapter 11 Education
Chapter 11
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
11.4 Measuring the Returns
to Education
11.5 The Role of the
Government in Higher
Education
11.6 Conclusion
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Chapter 11 Education
State and Local Government Expenditures
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11 . 1
Why Should the Government Be Involved in
Education?
Chapter 11 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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11 . 1
Why Should the Government Be Involved in
Education?
Chapter 11 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
Why Should the Government Be Involved in
Education?
Chapter 11 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 lower-income 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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11 . 2
How Is the Government Involved in Education?
Free Public Education and Crowding Out
Chapter 11 Education
An important problem with the system of public education provision is
that it may crowd out private education provision.
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11 . 2
How Is the Government Involved in Education?
Chapter 11 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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11 . 2
How Is the Government Involved in Education?
Chapter 11 Education
Solving the Crowd-Out Problem: Vouchers
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Chapter 11 Education
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11 . 2
How Is the Government Involved in Education?
Solving the Crowd-Out Problem: Vouchers
Chapter 11 Education
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
How Is the Government Involved in Education?
Problems with Educational Vouchers
Chapter 11 Education
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
How Is the Government Involved in Education?
Problems with Educational Vouchers
Chapter 11 Education
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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11 . 2
How Is the Government Involved in Education?
Problems with Educational Vouchers
Chapter 11 Education
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
Evidence on Competition in Education Markets
Chapter 11 Education
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 are reviewed in the Empirical Evidence box.
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EMPIRICAL EVIDENCE
Chapter 11 Education
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.
• She noted that one cannot directly compare students who do and do not
use vouchers, since they may differ along many dimensions.
• This selective use of vouchers would bias any comparison between the
groups.
• Oversubscribed schools had to select randomly from all applicants, using
a lottery.
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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11 . 3
Evidence on Competition in Education Markets
Experience with Public School Choice
Chapter 11 Education
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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11 . 3
Evidence on Competition in Education Markets
Experience with Public School Incentives
Chapter 11 Education
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.
• First, they can lead schools and teachers to “teach to the test.”
• Second, schools can manipulate the pool of test takers and the conditions
under which they take tests to maximize success.
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Chapter 11 Education
International Evidence
Very popular where used
Vouchers often rationed
Internationally, voucher students perform better
Sweden has universal vouchers
public schools compete for students
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Chapter 11 Education
US economic studies, AER June 2007
Simulation of school quality and residential and school
choices for Chicago
Results
enrollment in private schools rise
residential choices affected by schools
fiscal burden shifted from property tax to income tax
private school quality gains
religious private schools benefit less
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Chapter 11 Education
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11 . 3
Evidence on Competition in Education Markets
Bottom Line on Vouchers and School Choice
Chapter 11 Education
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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11 . 4
Chapter 11 Education
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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11 . 4
Measuring the Returns to Education
Chapter 11 Education
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
Measuring the Returns to Education
Education as Human Capital Accumulation
Chapter 11 Education
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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EMPIRICAL EVIDENCE
Chapter 11 Education
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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11 . 4
Measuring the Returns to Education
Effect of Education Levels on Other Outcomes
Chapter 11 Education
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
Measuring the Returns to Education
The Impact of School Quality
Chapter 11 Education
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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EMPIRICAL EVIDENCE
ESTIMATING THE EFFECTS OF SCHOOL QUALITY
Chapter 11 Education
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
The Role of the Government in Higher Education
Chapter 11 Education
Current Government Role
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11 . 5
The Role of the Government in Higher Education
Current Government Role
Chapter 11 Education
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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11 . 5
The Role of the Government in Higher Education
Current Government Role
Chapter 11 Education
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
The Role of the Government in Higher Education
Current Government Role
Chapter 11 Education
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.
The four largest tax breaks add up to about $9 billion per year in forgone
government revenue.
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11 . 5
The Role of the Government in Higher Education
Chapter 11 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
Conclusion
Chapter 11 Education
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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Chapter 11 Education
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FY 2008 State of Iowa General Fund Estimated Appropriations
Chapter 11 Education
(Amounts in millions)
Justice System
$618.1
Administration &
Regulation
$257.4
Agriculture & Natural
Resources
$41.6
Economic
Development
$96.0
Health and
Human Services
$1,391.9
Education
$3,454.4
Total General Fund Appropriations - $5,859.5
© 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
Chapter 11 Education
© 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
Chapter 11 Education
© 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
Chapter 11 Education
© 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
Chapter 11 Education
© 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber
Chapter 11 Education
© 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber