Chapter 11: Education Figure 11-1: Education Spending and Outcomes Around the World

Public Economics Dr. Sauer

Rationale for government involvement in education: Positive Externalities - productivity - citizenship Market Failure - credit market failure (lack of collateral) Parental failure to maximize family utility Equality in Access - income mobility (redistribution) __________________________________________________________________________________ A Model of Free Public Education (Peltzman 1973) Individuals choose how much to spend on their childrens education. assume: more spending = higher quality education Public sector provides a fixed level of education spending (quality). If parents want higher quality, send children to private school. assume: cant top off public education by paying for tutoring, etc assume: if go to private school, forgo the free public education (simplicity: ignore education funding)

Parents face a tradeoff between spending on education and spending on other goods.

3 different families: X, Y, Z.

Initially, no free public school.

- spend on private school

Spending on Other Goods

Suppose the government provides EF level of education for free. Individuals can spend their entire income on other goods and still get EF education for their kids. If parents desire more than EF, they forgo free public education and the original budget constraint is relevant.
GY ICY

Gx

ICx

GZ Ex EY EZ

BC

ICZ Spending on Education

Family X can now achieve bundle A - spend _________ on other goods - get __________ education - higher indifference curve Family Y will likely ______________________________ - spend _______________ on other goods - some _____________ in education - higher indifference curve - crowding out Family Z will not change education spending Free public education - increases education level for some - decreases education level for some - does not affect education level for some

Vouchers 2

Suppose each family is given a voucher for education level EF. - give to public school for free education - give to private school to offset some tuition cost
Spending on Other Goods

The first segment of the BC is the same whether education is free or there is a voucher. The voucher will raise the amount that can be spent on education.

Gx

ICx

GY

Each family can now increase its consumption of both goods. ICY

GZ Ex EY EZ

BC

ICZ Spending on Education

Economic theory can support educational vouchers as a policy option in the US. Problems with Vouchers: 1. Excessive School Specialization 2. Inefficient / Inequitable use of public resources - for families like X, still attend public school and still takes government EF to finance - for families like Y, with vouchers they will now send their kids to private school, still costing government EF to finance (family makes up the difference) - for families like Z, with vouchers, now they get money toward tuition, which costs the government an additional EF to finance 3. Education Market may not be competitive - natural monopoly 4. Costs of Special Education - 5.8 million students - $50 billion (14% of total) 5. Segregation 3