1. Chapter 11: Education 11 - 1 Chapter 11 Education Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2. Chapter 11: Education 11 - 2 Introduction What schools do Elementary and secondary education Higher education

3. Chapter 11: Education 11 - 3 What Schools Do Skills, knowledge, and human capital Work ethic Schools provide a set of distinct services, some that provide benefits to the students and some to society. Reducing the number of criminals How to learn How to enjoy learning Screening and sorting Citizenship Services:

4. Chapter 11: Education 11 - 4 Elementary and Secondary Education Private schools would compete for parents School quality would vary A separation process would emerge Government could require schooling Uniform voucher plan Variable voucher plan Private schools without government Private schools with vouchers from the government

5. Chapter 11: Education 11 - 5 Elementary and Secondary Education Tuition is zero, and all local residents are guaranteed admission A residential separation process would emerge Financed through taxes Low-income people will have the option of private school Impacts public schools Public schools Public schools plus a refundable tax credit for private school tuition

6. Chapter 11: Education 11 - 6 Elementary and Secondary Education Tuition is a large burden to low-income families May have resistance to higher public school quality Voting power of parents in a public school system leads to taxes, not tuition Positive externality when parents choose a public school What is the optimal tuition gap? Tuition versus taxes The public/private school tuition gap

7. Chapter 11: Education 11 - 7 The Optimal Quality of a Public School Higher quality is higher cost per child Social optimum is where MC = ∑MB MB Y ∑MB Quality Figure 11.1 $600 $400 MC $200 81012 MB O Social optimum is reached when the cost- share (tax price) is in the same ratio as the MBs. Each family has different MBs

8. Chapter 11: Education 11 - 8 State Funding of Public Schools This equality goal is called income or wealth neutrality Some citizens believe children should have equal opportunity regardless of wealth or income Problem:Two districts that have the same tax rate will raise different amounts of revenue per pupil because of differing fiscal capacity. Solution:State government can redistribute income from high- to low-income cities.

9. Chapter 11: Education 11 - 9 State Funding of Public Schools Also called a guaranteed tax base plan Each district receives a grant per pupil for a basic minimum foundation to which the district can add its own spending Each district receives grants to reach the target tax base A foundation plan A district power equalizing plan Three approaches to achieve income neutrality:

10. Chapter 11: Education 11 - 10 State Funding of Public Schools The matching rate would be highest for low-income districts and would phase down as income per pupil rises The district’s price = 1/(1+m) A variable matching grant plan The district’s price cut = m/(1+m) Table 11.1 District’s Income State Matching Grant Rate (m) District’s PriceDistrict’s Price Cut Low2.033%67% Middle1.050% High0.191%9% m is the state matching grant rate

11. Chapter 11: Education 11 - 11 State versus Local Funding of Public Schools What makes a citizen favor a high or low state percentage? State governments on average provide about ____, local governments provide a little more than ____, and the federal government provides less than ____ of revenue spent by local districts. The imposition of state regulations The existence of positive externalities 50% 40% 10%

12. Chapter 11: Education 11 - 12 Improving Public Schools It is difficult to measure performance Varying pay with performance and discharge poor performers No Child Left Behind Act (2002) Paying teachers for performance Holding schools accountable for results Pay-for-performance generally works better than pay-strictly-by-seniority Attempt to hold public schools accountable for results through standardized tests

13. Chapter 11: Education 11 - 13 Higher Education Costs = foregone earnings + tuition The costs and benefits of higher education Benefits = increase in rest-of-life earnings + increased in rest-of-life job satisfaction + college may be a satisfying way to spend 4 years Most graduates enroll in higher education instead of going to work. Is this a good thing?

14. Chapter 11: Education 11 - 14 The Costs and Benefits of Higher Education B = benefits F = foregone earnings Age Rest-of-life earnings with college Rest-of-life earnings without college 18 22 B F T T = tuition Figure 11.2

15. Chapter 11: Education 11 - 15 Private Colleges without Government Problem: If the benefits of college are greater than the costs, than an individual will attend college To attend college, you must have family funds or borrow The cost occurs before the benefit of college. Access to college would depend on family income

16. Chapter 11: Education 11 - 16 Private Colleges without Government Solution: Student loans Resident tuition is less at public colleges Public colleges with tuition below cost Issues: funded by state taxes, can distort decisions, can cause inefficiency Solution:Student loans and financial aid Financial aid Direct loans and guaranteed loans Grants to students from low-income families

17. Chapter 11: Education 11 - 17 Summary What schools do Elementary and secondary education Higher education

18. Chapter 11: Education 11 - 18 Federal spending to assist low-income people The impact of assistance on poverty Refundable tax credits Preview of Chapter 12: Low-Income Assistance Unemployment compensation