CHAPTER 7: EDUCATION (AND
POSITIVE EXTERNALITIES FROM
CHAPTER 5)
POSITIVE EXTERNALITIES
Positive externality:
Ex: fence between your and neighbors yard
 Ex: research and development (R&D)
 Ex. Flu shots, education

The market failure with positive externalities occurs
because people consider only their private benefits
(MPB) and not the full social benefits (MSB) of their
decisions.
o
CONSIDER A RESEARCH AND DEVELOPMENT
EXAMPLE

Firms in investing in R&D consider private benefits and costs.

Their costs of production (MC) will be upward sloping as
usual.

_________________________________________________
(assuming there are significant returns to initial dollars
placed into R&D and that benefits are eventually
diminishing with additional dollars)

In an effort to maximize profits, firms will allocate
resources such that ______________ resulting in an
equilibrium quantity of research, Re

Graph on next slide
POSITIVE EXTERNALITIES--ROSEN
MC
MPB
Re
Research
per year
EXTERNAL BENEFITS OF R&D

However, there are marginal external benefits (MEB) to
R&D. Examples include:
 Creation of new production technology that allows all
firms to produce more efficiently (ex: mechanization or
computerization).



One medical breakthrough (equipment, drugs, new
methods) often leads to a series of new developments or
new branches of science.
_________________________________________________ with
increasing amounts of R&D—diminishing returns and thus
will be downward sloping.
Show the firm’s situation graphically (MC), MPB and MEB.
POSITIVE EXTERNALITIES--ROSEN
MC
MPB
MEB
Re
Research
per year
MARGINAL SOCIAL BENEFIT (MSB)

The true social benefit of allocating dollars to
R&D is given by marginal social benefit (MSB)
curve.



Add together as done previously for negative
externalities.
The socially efficient allocation of resources
occurs where______________________________.
POSITIVE EXTERNALITIES--ROSEN
MC
MSB = MPB + MEB
MPB
MEB
R1
R*
Research
per year
MARKET FAILURE AND SOLUTION




The free market results in:
_____________________________________________________________
____________________________________
Prices or valuations of R&D
are:_________________________________________________________
____________________________________________________________
one solution is to subsidize activities that have positive
externalities called _____________________________

The subsidy should be equal in dollar value to the marginal external
benefit (MEB) at the efficient level (R*). (Exactly as we did for taxes!)

Commonly done for flu immunizations—shots are free or subsidized by
government to encourage greater participation.
Empirical evidence suggests that the private (firm’s) rate of
return on R&D is roughly __________. The social rate of return is
approximately __________ Clearly, there are significant external
benefits.
PUBLIC EDUCATION AND POSITIVE
EXTERNALITIES
“A stable and democratic society is impossible without
a minimum degree of literacy and knowledge on the
part of most citizens and without widespread
acceptance of some common set of values. Education
can contribute to both. In consequence, the gain from
the education of a child accrues not only to the child
but also to other members of the society.
o
POSITIVE EXTERNALITIES IN PUBLIC EDUCATION
1.
_________________________________: educated persons are
more actively involved in their communities (including
volunteerism) and have higher voter participation rates and
may help improve the quality of the democratic process.
2.
_______________________________: higher literacy is
negatively related to crime rates (or at least violent crimes).
More educated; less crime.
3.
________________________________ an educated work force is
a more productive workforce; education is thought to be
necessary for the creation of new technologies that may
increase economic growth.

The presence of spillover benefits suggests that education
should be subsidized in accordance with its external benefits.
However, the US has “free and compulsory” K-12
education which cannot be justified on efficiency
grounds alone!
SHOULD THERE BE PUBLIC EDUCATION? AT
WHAT LEVEL? TYPICAL ARGUMENTS:
1. Strongest rationale for public education vs. private
education revolves around:
___________________________________________________
__________________________________________________

The suggestion is that if all education were privatized that
schools would focus on the productivity skill set which
increases wages for students and not necessarily place
emphasis on the social conventions, citizenry, etc that often
have small marginal benefits to individuals but have
significant external benefits to society.

Evidence suggests these the “citizenry” benefits accrue early
in education and may provide rationale for public education
at the primary (elementary) level but less so at the
secondary level or higher education
ARGUMENTS CONTINUED:
2. ___________________________________________: assuming
that education is a normal good (as income increases,
demand increases) families with higher incomes will
provide more education than families with lower income.
o
____________________________—refers to situations in
which low-income persons have a chance to raise their
incomes (be upwardly mobile in terms of income).
o
o
This is a widely held belief in democratic societies—that all
persons should have access to opportunities for income mobility.
lack of public education reduces income mobility resulting
in a larger gap between the “rich” and the “poor”. Public
education should theoretically “level” the playing field
among its citizens by providing “equal” access to all
families.
ARGUMENTS FOR PUBLIC EDUCATION
CONTINUED
3. Another argument in favor of public education
focuses on financial ability to pay for education and
__________________________________________
.
o
In the absence of public education, families would have to
self-finance all education resulting in large inequities
between the “rich” and the “poor”
o
if a family had a talented child and they wanted to make
sure their child had access to the best education they would
need to borrow money to finance her education. Credit
markets are unlikely to lend such funds (asymmetric
information—banks cannot tell if a given child is a good
investment or not);
ARGUMENTS FOR PUBLIC EDUCATION
4. _______________________________________
o
Even if such credit existed, would a family
necessarily choose to pay for education for a child if it
meant sacrificing consumption for the rest of the
family. Optimal provision of private education is not
likely.
o
As we will discuss later, a similar argument is used
to against public education suggesting that public
education “crowds out” private education and families
will opt to send their kids to the free public school
instead of investing in a better-quality, private
school.
ARGUMENTS AGAINST PUBLIC EDUCATION
1. Government provision of K-12 education is
inefficient—costs are too high given educational
attainments (outcomes)

the single largest expenditure item for state and local
governments is education.



They spend on average __________of their budgets to
provide this government service.
The US spends more than any other nation per pupil –
around ______________ for K-12 education.
The US spends more than ______________per pupil when
including higher education—more than any other nation in
the world.
REAL ANNUAL EXPENDITURE PER PUPIL IN PUBLIC
ELEMENTARY AND SECONDARY SCHOOLS (K-12)
Source: US Bureau of the Census [2009, p. 151]
US SPENDING VS. INTERNATIONAL SPENDING
Real Annual Expenditures on Private and Public Schools, All Levels of
Education (2007)
SOURCE: Organization for Economic Cooperation and Development [2007a].
ARGUMENTS AGAINST PUBLIC EDUCATIONCONTINUED
2. Although US spending levels on education are the
highest in the world, US educational outcomes (K-12)
are only “average” internationally and in some cases
are much lower than countries which far less wealth.

Scientific Literacy: The United States ________________
OECD countries in scientific literacy, and the U.S. score of
489 fell below the OECD average of 500 (OECD 2007).

_________________________ of U.S. fifteen-year-olds do not
reach the baseline level of science achievement. This is the
level at which students begin to demonstrate the science
competencies that will enable them to use science and
technology in life situations (OECD 2007)
US EDUCATION STATISTICS CONTINUED

Mathematics Literacy: The United States ranks
_________________of OECD countries in mathematics
literacy, and the average score of 474 fell well below
the OECD average of 498. Scores have not
measurably changed since 2003, when the United
States ranked 24th of 29 countries (OECD 2007b).

____________________________of American fifteenyear-olds performed below the baseline level of
mathematics proficiency at which students begin to
demonstrate the kind of skills that enable them to
use mathematics actively in daily life (OECD 2007b)

Reading Literacy: The United States ranked of
__________________ OECD countries in reading
literacy, and with a score of 495, came in near the
OECD average of 500
ARGUMENTS AGAINST PUBLIC EDUCATION
3.
______________________________________________
____________________________________
o
_________________________refers to situations in
which public provision of a good substitutes for
private provision of a good (reducing demand for
privately provided goods).
o
Such crowding out may result in lower educational
outcomes.
Quantity of all other goods
HOW DOES CROWING OUT OCCUR?
A
x
ii
i
B
ep
e0
Quantity of Education
GRAPH SUMMARY
In the absence of public education each person
maximizes utility by selecting the highest
indifference curve attainable resulting in Eo
education purchased.
 If public education is provided at a fixed level,
Ep, then the consumer re-evaluates his utility
maximization and can now reach a higher
indifference curve by going to public school.
 Private education is “crowded out” by the
existence of public education.
 This doesn’t have to be the case, depending on
preferences, individuals may not reduce private
education and no crowding out may occur.

NO CROWDING OUT OCCURS IF THERE IS A
Quantity of all other goods
STRONG PREFERENCE FOR LARGER
QUANTITIES OF EDUCATION
A
x
ii
i
B
ep
e0
Quantity of Education
ARGUMENTS AGAINST PUBLIC
EDUCATION CONTINUED
4.
______________________________________________
____________________________________________
o
This results in tremendous inequity between “rich”
and “poor” geographic areas.
o
Many believe states should find alternative
mechanisms, such as income taxes (as done in Iowa),
to more fairly distribute funds to schools.
o
PBS video
WHAT FACTORS ARE USED TO MEASURE
EDUCATIONAL OUTCOMES?
1.
•
Difficulty is that test scores alone do not tell you
much. Students in different school districts may
have other family/socioeconomic characteristics that
impact learning.
•
Evidence suggests there is no direct relationship
between spending and outcomes.
2.
3.
4.
5.
WHAT ARE THE LEADING DETERMINANTS
IN EDUCATIONAL SUCCESS OF STUDENTS

Clearly, money is not the answer. Spending per pupil has more than doubled in
the last 25 years and educational outcomes are no better (and in many cases
worse) on average.



Information here can be biased. Sometimes wealthier school districts have smaller
classes and better educational outcomes. However, this could be because of different
socioeconomic factors and not necessarily small class size.

Information may be biased in the other direction too. Sometimes we have small classes
for students with learning disadvantages. Their test scores may be lower suggesting
small class size has a negative impact on learning.

Literature suggests that to reduce the teacher-student ratio by 10% (go from 30
students to 1 teacher to 27 students to 1 teacher) costs an additional $700 per student.

Costs are very high and sometimes reduces the experience level of teachers (hire on
more new teachers)
Within the literature, the single most important factor for a child’s educational
success is :_________________________________________
SCHOOL VOUCHERS



In essence, a school voucher is money given to parents of a child
attending a K-12 school that may be applied to private education
instead of going to the school to which the child is assigned.
The notion of school vouchers were first introduced (in a modern
way) in the 1950s by Milton Friedman.
Friedman, a Nobel Prize Economists (1976) created a book series
entitled “Free to Choose” in 1980. The series examined how free
markets encourage prosperity and included an entire section on
school vouchers. PBS created a series based on “Free to Choose”
with Friedman narrating. This started the “modern” trend toward
usage of school vouchers.

www.ideachannel.tv (you can view the original broadcast as volume 6:
What is wrong with our schools?)
FRIEDMAN AND SCHOOL VOUCHERS

According to Friedman, school vouchers would increase
competition among school and improve cost efficiency.

Schools would have incentives to:

Schools would have incentives to:

Parents would be “free to choose” where there children went to
school increasing incentives for parents to become more
involved in the educational process.

Friedman suggests in 1980 that the centralized school system is run by
bureaucrats that may have different “goals” than those of parents and
that parents do not have power in the system to make significant
changes.
GRAPH OF HOW VOUCHERS WORK
ARGUMENTS FROM PROPONENTS OF SCHOOL
VOUCHERS
1.
2.
_____________________________ vouchers allow parents the
freedom of choice so they may more closely match their
educational choices with their tastes.
o
____________________________________________ suggests that people
already individually determine this through their location decision.
Families locate in certain areas that have the proper mix of property
taxes (for education) and educational quality.
o
However, property taxes are used to supply an array of government
services and people make their location decision based on many
attributes, not just schooling; therefore this self-sorting mechanism
may not work perfectly
_______________________________ results in greater cost
efficiency and better educational outcomes (quality).
o
This includes greater educational outcomes of public schools which
must now improve to keep their funding.
o
Remember, school funding per pupil has doubled since 1980 but test
scores have not improved.
o
Further, administrative staff in public schools has grown by 65%
since 1970 and the number of students has only grown by 2% (US
Dept of Education 2006).
PROPONENTS OF VOUCHERS CONTINUED
3. Vouchers allow students in failing schools an
escape hatch—a way to improve their
educational quality and “income mobility”
4. Vouchers provide parents a stronger voice in
their children’s education (curriculum,
methodology, etc). Since they may easily move
their child away from one school to another
better option, schools are more likely to be open
to parental input.
ARGUMENTS—OPPONENTS OF SCHOOL
VOUCHERS
1.
___________________________________________the positive
externalities associated with civic engagement, etc may be
minimized by schools to focus on specialty skill sets (tastes) and
undercuts the benefit of common programming.
o
With private education there is no “educational standard” or
way of enforcing standards across schools
o
Opponents cite examples of schools focusing on the “arts”
and not having comprehensive programming such as basic
reading and math skills.
o
Proponents of vouchers say this could easily be handled by
setting minimum standards and giving standardized tests.
2.
______________________________________________—as the best
students leave failing schools for better opportunities the worst
students remain reducing educational quality.
o
“cream skimming”—
o
Private schools have many school voucher applicants but
will only take the “good” students and not “all” students
ARGUMENTS AGAINST VOUCHERS
CONTINUED
3. __________________________________________: if
motivated parents differ from disinterested parents
along income, race, or ethnic lines you will observe a
“sorting” of students along these lines.
o
4.
proponents of vouchers say the educational freedom will
result in less segregation as lower income students can
move to better school districts.
__________________________________________________
___________________________________ there are cost
efficiencies in current school districts and much like a
monopoly, if you increase competition by providing
lots of smaller schools the economies of scale are
foregone resulting in higher costs.
o
how can a rural area support enough schools for adequate
competition when there is not sufficient demand (children).
OPPONENTS OF VOUCHERS CONTINUED
5. _______________________________Vouchers are
based on “per pupil spending” but this
disadvantages families with children requiring
special education
o
students with developmental and learning
disabilities require additional monitoring, diagnostic
testing, and accommodations. The per pupil spending
level is not enough to provide adequately for these
children.
6. ___________________________________ many
private schools have a religious affiliation. Many
people believe it is unfair and/or unconstitutional
to spend government dollars on religious
education.
SCHOOL VOUCHERS IN PRACTICE TODAY


School vouchers have been used in other countries for
many years (including Chile, Hong Kong, Sweden,
Norway, Ireland).
In most cases, the voucher is:


In some states, it is the “average” spending level per
child in the state.
The school voucher can be used at any qualifying private
school to fully or partially cover tuition expense.
 Much controversy over what schools should qualify.
 Heated debate over “religious” private education such
as Catholic private schools and “separation of church
and state”.
US VOUCHERS

In the US, the first school voucher system was done in
Milwaukee, Wisconsin in 1990.
This was a small scale voucher system in which families earning
income no more than 175% of the poverty line could receive a
voucher worth $3200 that could be used at any non-religious
private school.
 As of 2007, the program has expanded and 15,000 students in
Milwaukee are using vouchers.


Other areas with vouchers include:

Washington D.C. (called the DC Opportunity Scholarship
Program);

Cleveland, Ohio (after much legal battling over
constitutional issues)

Florida (Florida Opportunity Scholarship Program)—
allowed students in failing schools to attend other schools of
their choice—declared unconstitutional in 2005. Still facing
legal issues and back on the political agenda currently
EVIDENCE ON EFFECTIVENESS OF
VOUCHERS
Evidence is mixed with regard to effectiveness of
vouchers (measured in terms of educational
success or higher scores on exams, dropout rates,
etc).
 Part of the problem is accounting for intangible,
and often, immeasurable differences among
students such as ambition, parental influence,
etc.

Students that use vouchers are probably more
motivated than those that do not.
 Also, in some states or voucher areas, private school
select admits from an applicant pool most likely
taking the best students.

MILWAUKEE VOUCHER PROGRAM DATA

Much of the empirical evidence is based on the
Milwaukee pilot program for a few reasons:
1.
2.
o
participating private schools had to accept any
voucher
If the private school was “oversubscribed” –meaning
that there were more applicants than open spots then
they had to determine admission via random lottery
This means that empirically you could now
compare those that wanted to use vouchers in two
different environments: private school vs. public
school without bias
o
Control group:
o
Treatment group:
EARLY FINDINGS BY ROUSE (1998) AND
OTHERS

Rouse: There was an increase in educational success
within the treatment group
An increase in math scores by ______________________that
students were in private school relative to the control
group
 Other measures in reading, etc were not statistically
different

o
Findings in Colombia Voucher Program which has
over 125,000 students (Angrist et al 2002)
Students that won vouchers via lottery were :
_____________________________________.
o Students scored higher on standardized tests
o The cost to government was ___________________and wages
for the “winners” increased between ____________________
o
OTHER TYPES OF PROGRAMS AND POLICIES
THAT PROVIDE PUBLIC SCHOOL INCENTIVES


_______________________________ schools must
measure performance of students to ensure they are
meeting or exceeding educational standards
(Handshek and Raymond 2004) evidence:

As of 2002, 25 states in US directly linked student
promotion to the next grade of graduation to performance
on state and local assessment tests

18 states rewarded teachers and/or administrators for
successful student performance on exams

20 states penalized teachers and administrators for subpar
student performance

Found a direct link between rewards/penalties and school
performance—”sizeable improvements in test scores”
NO CHILD LEFT BEHIND (NCLB)

This idea of school accountability was formalized into US law
in 2001 with the “No Child Left Behind Act of 2001”
(President Bush)

Based on the idea of “standards-based educational
reform”

Each state sets its own standard (assessment test and
minimum compliance)

States that do not submit assessment plans and outcomes will
have their federal funding rescinded

Federal funding for education NCLB increased initially from
$17.4 billion in 2001 to $24.4 billion in 2007 (40% increase) in
part to pay for assessment, to pay for new and improved school
programming, and to fund reward programs, etc.
PROPONENTS OF NCLB
1.
Suggest that NCLB:
2.
Schools must provide detailed reports to parenting on the
teacher qualifications in the school where their child
attends
3.
o
o
Creates common standards among all school districts in a
state
Forces schools identify “at risk” populations and target
programs at those students
4.
5.
provides school choice for students in failing schools
(schools receiving a grade of F—students can move to a
new district)
CRITICISMS OF NO CHILD LEFT BEHIND
1.
o
o
Implication is that teachers narrowly focus education on
the tested items enabling students to perform well on
test and not a broad education
There is empirical evidence which suggests that this is
the case—students do well on the standardized test but
when given an alternative test, scores are significantly
reduced.
2.
o
o
Jacob (2002) found that in both Chicago and Florida
school systems many low performing students were
reclassified as special education students or disabled so
scores would not be counted in the school average.
Jacob and Levitt (2003) found evidence that teachers
may cheat (providing answers) if they are rewarded
financially for improved student performance.
CRITICISMS OF NCLB
3. States may actual lower standards to ensure
school districts meet standards to maintain
their federal funds
4. Talented students may receive less funding and
funding is shifted to at risk populations
5. Less funding for arts and elective courses as
more resources are focused on the basics of
math, science, and reading.
6. NCLB requires military recruiter access to
schools facilitating military enrollment
CHARTER SCHOOLS AND MAGNET
SCHOOLS—SCHOOL CHOICE ALTERNATIVE

______________________ are small, independent
schools that are not subject to many of the
regulations imposed on traditional public schools.
Operated by private enterprises with own internal
regulations
 They do not have to follow same restrictive hiring
procedures for teachers
 More flexibility in curriculum, hiring and firing of
administrative staff.
 Charter schools often have a particular focus—either
in terms of the learning objectives or the student
demographic


Ex: Beardstown, IL Charter School for English as a Second
Language Students
MAGNET SCHOOLS

_______________________: special public schools set
up to attract talented students or students
interested in a particular subject or teaching style
School of the arts
 Schools of Science and Technology

o
o
Magnet schools are still public schools and must
abide by administrative procedures and policies.
Empirical evidence of educational improvement in
magnet schools is mixed or inconclusive.
Most studies find no improvement or no statistically
significant improvement
o Where small gains in improvement exist is when there
is a large degree of competition.
o