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 Chapter 1 The Economics of Education

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 Public sector Private sector Education Copyright © Allyn & Bacon 2008 Human Capital

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 Copyright © Allyn & Bacon 2008 Marx Keynes Galbraith Friedman Smith Communist Government Intervention Liberal Conservative Capitalist

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 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

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 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