1. Education

2. Introduction Education  Can be privately provided  Has features that invoke government intervention → collective good  Similar to health care Distinguish between  Early education  Higher education/University

3. A little history In feudal societies education of children was a privately financed luxury  Poorer children had no education Higher education (Universities) was a collective/public good → you needed to pass a test in Latin to access the University After feudalism demand for education rose → ‘public’ school system (=not at home on individual basis, still privately financed), boarding schools In XIXth century, governments made education entitlement → compulsory up to a certain age → beginning of public education  To subtract children from labor  To reduce influence of from religious institutions

4. Economic nature of the education Efficient class size > 1 pupil  Collective benefits and shared costs  Congestion beyond certain # 2 broad forms of organization  Publicly financed with free access  Provided by market through private financing and user prices/vouchers User prices are  Inefficient if result in exclusion → vouchers  Efficient when there is congestion and ease of replication

5. Rationales for public education Natural/enforced monopoly Externalities Paternalism Moral hazard and social insurance

6. Natural monopoly Education is natural monopoly if there is a least distance requirement → gov. intervenes by providing free access to gov. schools  Pertinent in rural areas, not so in cities  Competitive bids alternative Natural monopoly engenders regulation → here educational standards Problems are  Grade inflation  Moral hazard where teaching effort is unobservable  Bureaucratization of school system → possibly to overcome moral hazard problem

7. Externality Most frequently used argument Social interactions more profitable among similarly/highly educated individuals  Virtuous circle in teaching  Economic growth  Minimization of governing costs Negative externality also possible  If people study to get a degree and no correlation exists between proficiency at school and return from education → rent seeking

8. Paternalism Compulsory schooling overrides parental decision  Parents might be unwilling or unable to send their children at school No externality here → child is entitled to education because of his/her private benefit Minimizes contrasts within families about schooling decisions Public schools emerge as a way to control the delivery of entitlement

9. Moral hazard Entitlement to education aimed at making people self sufficient → not dependent on future government subsidization If amount of education was a private decision → moral hazard problem Education as income augmenting program in assistance Another argument for publicly provided education

10. Determinants of quality of education Great varaiance in quality of education (e.g., PISA program) Analysis of determinants (in children education)  Resources  Class size  Interactions with fellow students → location  Family background  Teacher motivation → with largest coefficient  Private education/schools → CV effect

11. Quality of education and spending These relationships are not so obvious Schansberg (1996) finds that in NY state public schools have 60% more administrators and 10 more employees per students than Catholic schools → Catholic schools are still perceived to be better Motivation/social standing seems to be the main driver of teacher productivity → higher salaries might become a compensation for teaching in bad (public) schools Coexistence of private and public schools creates  Opting out of the rich  Adverse selection in public schools The more parents send children to private schools → the less people benefit from government education → the less the MV is willing to spend on public education Short sighted MV → more future transfers needed to support poorly educated people

12. Education and income distribution Research shows that  Ability is normally distributed  Distribution of income and wealth right skewed If high ability-low income people are denied equal access to educational opportunities → family income disparities perpetuated Vouchers de-link education from  Parents’ ability/willingness to pay  Location of housing Vouchers permit competition between schools Competition generate wider scope of choice among curricula → parents’ preferences about education are more frequently satisfied But:  Excessive diversity in curricula  Parents might be unable to evaluate the quality of education (elusive concept, with time dimension)

13. Affirmative action Alternative to vouchers Compensate for inequalities in  Family background  Students’ abilities Controversial because  Individual evaluation discarded for average evaluation  Obfuscates merit  Creates disadvantages for non targeted groups Difficult to discuss about affirmative action because  Arguments based on ideas of justice  Empirical assessment of merits is difficult→ generational lags

14. Excellence vs. access Gov intervention standardizes education Emphasis on access to everybody → special needs targeted on lower tail of ability distribution Needs of those on higher tail left to market  Problems because these needs are much more diversified

15. Where is the end? When does the entitlement ends? Smith (1776) → at 6 years of age Should we end at high school? University? → problem of higher education → free access vs. private

16. Student loans Alternative to private higher education via user prices Student loans face a moral hazard problem → only student knows his/her effort → low effort might not provide an income to repay the loan → time gap → lender refuses to extend the loan Government intervention Problems with withdrawal from labor force Who bears the cost of default?  Family? Other students? Population of taxpayers?

17. Alternatives Free education → same problems as for childsren education Scholarships  Balance between educational achievement and family background