1. The Economics of Education Crisis and Reform 6

2. Introduction Effectiveness of the US education system The US education “crisis” Alternative ways of offering education Rationales for government intervention

3. Effectiveness of K-12 Education CountryMathScience United States 504527 Singapore 605578 Japan 570552 Netherlands 536 Russian Federation 508514 Australia 505527 Sweden 499524 Italy 484491 Norway 461494 Cyprus 459441 American eighth graders versus the world, 2003

4. Effectiveness of K-12 Education CountryExpenditure /student ($) Expenditure as % of GDP United States 88553.5 Norway 84763.9 Italy 72183.2 Australia 68943.9 Sweden 63394.9 Japan 62662.7 Netherlands 59123.2 International Comparison of Education Expenditure

5. Education as a Publicly Provided Good K-12 education is delivered in a system of primarily public education 90% of school aged children in the US attend public schools

6. Objective Understanding the market for education What is the most appropriate framework for offering education? Suggestion for reforming the current system

7. Free Market for K-12: Demand side No public schools and no regulation requiring school attendance Value placed on education: Additional earning to the individual as a result of extending education Better decision making Interpersonal relationships Pure satisfaction from learning

8. Free Market for K-12: Supply Side On the supply side we assume: The market is perfectly competitive No externalities in production (MSC=MPC) Constant marginal cost

9. Market for K-12 Quantity 0 $ Demand $5,000 Supply (MC) Q equilibrium

10. Externalities from Education Positive externalities in consumption: the benefits from education spill over to a third party Positive externalities from: More rapid economic growth Better functioning democratic process Better safety and hygiene Greater charitable contribution Better decision making and more efficient functioning of markets

11. Externalities From Education 10 Consumer 1 1 1 1 Marginal social benefit > Marginal private benefit

12. Magnitude of Spillovers Evidence: The absolute size of the positive externality declines as a student progresses through K-12 education. What does that imply about the shape of the MSB curve?

13. Externalities From Education Quantity 0 $ Demand $5,000 Q equilibrium Supply (MC) MSB 1 The spillover effect is relatively small. The MSB is given by MSB 1 The market for education is efficient

14. Externalities From Education Quantity 0 $ Demand $5,000 Q equilibrium Supply (MC) Q optimal MSB 2 The spillover effect is relatively large. The MSB is given by MSB 2 The market for education is inefficient

15. Externalities From Education Quantity 0 $ Demand $5,000 Q equilibrium Supply (MC) Q optimal MSB 1 A subsidy of $1000 $4,000 Supply (MC) with the subsidy

16. Rationale for government intervention Does the need to ensure the provision of quality education justify government intervention? No Absent any information problems, the market provides high quality education if there is enough demand for it.

17. Taylor, Lori (1999). “ Government’s Role in Primary and Secondary Education,” Federal Reserve Bank of Dallas Economic Review, first quarter Positive Externalities Capital Market Failure Enforcing a child-parent contract Altruism towards children Rationale for government intervention

18. Taylor, Lori (1999). “ Government’s Role in Primary and Secondary Education,” Federal Reserve Bank of Dallas Economic Review, first quarter Justification for intervention: Ensure families have access to credit Subsidize part of the education cost Conclusion 1: families should pay most of the education costs

19. Rationale for government provision Does the need for Social and Cultural Cohesion justify government provision? US population is very diverse The need to share common experience to avoid breaking apart along those differences K-12 system as a melting pot Builds a shared moral framework that holds society

20. Rationale for government provision Does the need for Social and Cultural Cohesion justify government intervention? A private education market will lead to Schools that do not necessarily perpetuate important cultural values, e.g., tolerance, equality Provision of a differentiated product: schools distinguished by a cultural, racial or religious character Segregation: schools have children with similar backgrounds Unequal opportunity for success as high income families have more options.

21. Rationale for government provision Taylor, Lori (1999). “ Government’s Role in Primary and Secondary Education,” Federal Reserve Bank of Dallas Economic Review, first quarter No Empirical evidence suggesting the gains from “common education experience” outweigh the inefficiency of public provision Conclusion 2: Government should play no role in providing educational services

22. Rationale for government provision Taylor, Lori (1999). “ Government’s Role in Primary and Secondary Education,” Federal Reserve Bank of Dallas Economic Review, first quarter Conclusion 3: If the government finances education, then it should monitor the educational outcome

23. Inefficiencies of Public Provision Excessive centralization Bureaucracy Lack of effective parental input Lack of competition These inefficiencies impact the educational output

24. Education Crisis? Output of Education System: Proficiency in different subjects Interpersonal skills Cultural and ethical values How to measure the education output? Scores Graduation rates Lifetime earnings

25. Solutions School Choice and Vouchers Problems: cream skimming, more segregation School Resources: e.g., smaller class size Effective, but do gains justify costs?

26. Solutions No Child Left Behind a Performance Standard Measures the education output through standardized tests Punish schools that do not reach target proficiency Problems: incentives to change standard, diminishing marginal improvement to school effort, ignores education production function and other factors that are influential

27. Education Production Function Achievement = f (H, P, T, S) H: Home environment P: Peer group T: Teachers S: Class size Externalities from the peer group Favorable peers are smart, motivated, not disruptive Evidence that low achievers have the most to gain Evidence that peer effects most important for grades 5-12