Chapter 7: Education (and positive externalities from Chapter 5)

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Chapter 7 Education (and positive externalities
from Chapter 5)
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Positive externalities

• Positive externality
• Ex fence between your and neighbors yard
• Ex research and development (RD)
• Ex. Flu shots, education
• The market failure with positive externalities
  occurs
• because people consider only their private
  benefits
• (MPB) and not the full social benefits (MSB) of
  their
• decisions.

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Consider a Research and Development example

• Firms in investing in RD consider private
  benefits and costs.
• Their costs of production (MC) will be upward
  sloping as usual.
• _________________________________________________
  (assuming there are significant returns to
  initial dollars placed into RD and that benefits
  are eventually diminishing with additional
  dollars)
• In an effort to maximize profits, firms will
  allocate resources such that ______________
  resulting in an equilibrium quantity of research,
  Re
• Graph on next slide

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Positive Externalities--rosen
MC
MPB
Re
Researchper year
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External benefits of RD

• However, there are marginal external benefits
  (MEB) to RD. Examples include
• Creation of new production technology that allows
  all firms to produce more efficiently (ex
  mechanization or computerization).
• One medical breakthrough (equipment, drugs, new
  methods) often leads to a series of new
  developments or new branches of science.
• _________________________________________________
  with increasing amounts of RDdiminishing
  returns and thus will be downward sloping.
• Show the firms situation graphically (MC), MPB
  and MEB.

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Positive Externalities--rosen
MC
MPB
MEB
Re
Researchper year
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Marginal Social Benefit (MSB)

• The true social benefit of allocating dollars to
  RD is given by marginal social benefit (MSB)
  curve.
• Add together as done previously for negative
  externalities.
• The socially efficient allocation of resources
  occurs where______________________________.

8
Positive Externalities--rosen
MC
MSB MPB MEB
MPB
MEB
R
R1
Researchper year
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Market failure and solution

• The free market results in ______________________
  __________________________________________________
  _________________________
• Prices or valuations of RD are__________________
  __________________________________________________
  _________________________________________________
• one solution is to subsidize activities that
  have positive externalities called
  _____________________________
• The subsidy should be equal in dollar value to
  the marginal external benefit (MEB) at the
  efficient level (R). (Exactly as we did for
  taxes!)
• Commonly done for flu immunizationsshots are
  free or subsidized by government to encourage
  greater participation.
• Empirical evidence suggests that the private
  (firms) rate of return on RD is roughly
  __________. The social rate of return is
  approximately __________ Clearly, there are
  significant external benefits.

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Public education and positive externalities

• A stable and democratic society is impossible
  without a minimum degree of literacy and
  knowledge on the part of most citizens and
  without widespread acceptance of some common set
  of values. Education can contribute to both. In
  consequence, the gain from the education of a
  child accrues not only to the child but also to
  other members of the society.

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Positive externalities in Public education

• _________________________________ educated
  persons are more actively involved in their
  communities (including volunteerism) and have
  higher voter participation rates and may help
  improve the quality of the democratic process.
• _______________________________ higher literacy
  is negatively related to crime rates (or at least
  violent crimes). More educated less crime.
• ________________________________ an educated work
  force is a more productive workforce education
  is thought to be necessary for the creation of
  new technologies that may increase economic
  growth.
• The presence of spillover benefits suggests that
  education should be subsidized in accordance with
  its external benefits. However, the US has free
  and compulsory K-12 education which cannot be
  justified on efficiency grounds alone!

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Should there be public education? At what level?
Typical arguments

• 1. Strongest rationale for public education vs.
  private education revolves around
  __________________________________________________
  __________________________________________________
  _
• The suggestion is that if all education were
  privatized that schools would focus on the
  productivity skill set which increases wages for
  students and not necessarily place emphasis on
  the social conventions, citizenry, etc that often
  have small marginal benefits to individuals but
  have significant external benefits to society.
• Evidence suggests these the citizenry benefits
  accrue early in education and may provide
  rationale for public education at the primary
  (elementary) level but less so at the secondary
  level or higher education

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Arguments continued

• 2. ___________________________________________
  assuming that education is a normal good (as
  income increases, demand increases) families with
  higher incomes will provide more education than
  families with lower income.
• ____________________________refers to situations
  in which low-income persons have a chance to
  raise their incomes (be upwardly mobile in terms
  of income).
• This is a widely held belief in democratic
  societiesthat all persons should have access to
  opportunities for income mobility.
• lack of public education reduces income mobility
  resulting in a larger gap between the rich and
  the poor. Public education should theoretically
  level the playing field among its citizens by
  providing equal access to all families.

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Arguments for public education continued

• 3. Another argument in favor of public education
  focuses on financial ability to pay for education
  and __________________________________________
• In the absence of public education, families
  would have to self-finance all education
  resulting in large inequities between the rich
  and the poor
• if a family had a talented child and they wanted
  to make sure their child had access to the best
  education they would need to borrow money to
  finance her education. Credit markets are
  unlikely to lend such funds (asymmetric
  informationbanks cannot tell if a given child is
  a good investment or not)
• .

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Arguments for public education

• 4. _______________________________________
• Even if such credit existed, would a family
  necessarily choose to pay for education for a
  child if it meant sacrificing consumption for the
  rest of the family. Optimal provision of private
  education is not likely.
• As we will discuss later, a similar argument is
  used to against public education suggesting that
  public education crowds out private education
  and families will opt to send their kids to the
  free public school instead of investing in a
  better-quality, private school.

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Arguments against public education

• 1. Government provision of K-12 education is
  inefficientcosts are too high given educational
  attainments (outcomes)
• the single largest expenditure item for state and
  local governments is education.
• They spend on average __________of their budgets
  to provide this government service.
• The US spends more than any other nation per
  pupil around ______________ for K-12 education.
• The US spends more than ______________per pupil
  when including higher educationmore than any
  other nation in the world.

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Real Annual Expenditure Per Pupil in Public
Elementary and Secondary Schools (K-12)
Source US Bureau of the Census 2009, p. 151
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US spending vs. international spending
Real Annual Expenditures on Private and Public
Schools, All Levels of Education (2007)
SOURCE Organization for Economic Cooperation and Development 2007a.
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Arguments against Public Education-continued

• 2. Although US spending levels on education are
  the highest in the world, US educational outcomes
  (K-12) are only average internationally and in
  some cases are much lower than countries which
  far less wealth.
• Scientific Literacy The United States
  ________________ OECD countries in scientific
  literacy, and the U.S. score of 489 fell below
  the OECD average of 500 (OECD 2007).
• _________________________ of U.S.
  fifteen-year-olds do not reach the baseline level
  of science achievement. This is the level at
  which students begin to demonstrate the science
  competencies that will enable them to use science
  and technology in life situations (OECD 2007)

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US education statistics continued

• Mathematics Literacy The United States ranks
  _________________of OECD countries in mathematics
  literacy, and the average score of 474 fell well
  below the OECD average of 498. Scores have not
  measurably changed since 2003, when the United
  States ranked 24th of 29 countries (OECD 2007b).
• ____________________________of American
  fifteen-year-olds performed below the baseline
  level of mathematics proficiency at which
  students begin to demonstrate the kind of skills
  that enable them to use mathematics actively in
  daily life (OECD 2007b)
• Reading Literacy The United States ranked of
  __________________ OECD countries in reading
  literacy, and with a score of 495, came in near
  the OECD average of 500

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Arguments against public education

• 3. _______________________________________________
  ___________________________________
• _________________________refers to situations in
  which public provision of a good substitutes for
  private provision of a good (reducing demand for
  privately provided goods).
• Such crowding out may result in lower educational
  outcomes.

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How does crowing out occur?
A
x
Quantity of all other goods
ii
i
B
Quantity of Education
e0
ep
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Graph summary

• In the absence of public education each person
  maximizes utility by selecting the highest
  indifference curve attainable resulting in Eo
  education purchased.
• If public education is provided at a fixed level,
  Ep, then the consumer re-evaluates his utility
  maximization and can now reach a higher
  indifference curve by going to public school.
• Private education is crowded out by the
  existence of public education.
• This doesnt have to be the case, depending on
  preferences, individuals may not reduce private
  education and no crowding out may occur.

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No Crowding Out occurs if there is a strong
preference for larger quantities of education
A
x
Quantity of all other goods
ii
i
B
Quantity of Education
e0
ep
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ARGUMENTS AGAINST PUBLIC EDUCATION CONTINUED

• 4. _______________________________________________
  ___________________________________________
• This results in tremendous inequity between
  rich and poor geographic areas.
• Many believe states should find alternative
  mechanisms, such as income taxes (as done in
  Iowa), to more fairly distribute funds to
  schools.
• PBS video

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What factors are used to measure educational
outcomes?

• Difficulty is that test scores alone do not tell
  you much. Students in different school districts
  may have other family/socioeconomic
  characteristics that impact learning.
• Evidence suggests there is no direct relationship
  between spending and outcomes.

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what are the leading determinants in educational
success of students

• Clearly, money is not the answer. Spending per
  pupil has more than doubled in the last 25 years
  and educational outcomes are no better (and in
  many cases worse) on average.
• Information here can be biased. Sometimes
  wealthier school districts have smaller classes
  and better educational outcomes. However, this
  could be because of different socioeconomic
  factors and not necessarily small class size.
• Information may be biased in the other direction
  too. Sometimes we have small classes for students
  with learning disadvantages. Their test scores
  may be lower suggesting small class size has a
  negative impact on learning.
• Literature suggests that to reduce the
  teacher-student ratio by 10 (go from 30 students
  to 1 teacher to 27 students to 1 teacher) costs
  an additional 700 per student.
• Costs are very high and sometimes reduces the
  experience level of teachers (hire on more new
  teachers)
• Within the literature, the single most important
  factor for a childs educational success is
  _________________________________________

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School vouchers

• In essence, a school voucher is money given to
  parents of a child attending a K-12 school that
  may be applied to private education instead of
  going to the school to which the child is
  assigned.
• The notion of school vouchers were first
  introduced (in a modern way) in the 1950s by
  Milton Friedman.
• Friedman, a Nobel Prize Economists (1976) created
  a book series entitled Free to Choose in 1980.
  The series examined how free markets encourage
  prosperity and included an entire section on
  school vouchers. PBS created a series based on
  Free to Choose with Friedman narrating. This
  started the modern trend toward usage of school
  vouchers.
• www.ideachannel.tv (you can view the original
  broadcast as volume 6 What is wrong with our
  schools?)

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Friedman and school vouchers

• According to Friedman, school vouchers would
  increase competition among school and improve
  cost efficiency.
• Schools would have incentives to
• Schools would have incentives to
• Parents would be free to choose where there
  children went to school increasing incentives for
  parents to become more involved in the
  educational process.
• Friedman suggests in 1980 that the centralized
  school system is run by bureaucrats that may have
  different goals than those of parents and that
  parents do not have power in the system to make
  significant changes.

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Graph of how vouchers work
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Arguments from Proponents of school vouchers

• _____________________________ vouchers allow
  parents the freedom of choice so they may more
  closely match their educational choices with
  their tastes.
• ____________________________________________
  suggests that people already individually
  determine this through their location decision.
  Families locate in certain areas that have the
  proper mix of property taxes (for education) and
  educational quality.
• However, property taxes are used to supply an
  array of government services and people make
  their location decision based on many attributes,
  not just schooling therefore this self-sorting
  mechanism may not work perfectly
• _______________________________ results in
  greater cost efficiency and better educational
  outcomes (quality).
• This includes greater educational outcomes of
  public schools which must now improve to keep
  their funding.
• Remember, school funding per pupil has doubled
  since 1980 but test scores have not improved.
• Further, administrative staff in public schools
  has grown by 65 since 1970 and the number of
  students has only grown by 2 (US Dept of
  Education 2006).

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Proponents of vouchers continued

• 3. Vouchers allow students in failing schools an
  escape hatcha way to improve their educational
  quality and income mobility
• 4. Vouchers provide parents a stronger voice in
  their childrens education (curriculum,
  methodology, etc). Since they may easily move
  their child away from one school to another
  better option, schools are more likely to be open
  to parental input.

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Argumentsopponents of school vouchers

• ___________________________________________the
  positive externalities associated with civic
  engagement, etc may be minimized by schools to
  focus on specialty skill sets (tastes) and
  undercuts the benefit of common programming.
• With private education there is no educational
  standard or way of enforcing standards across
  schools
• Opponents cite examples of schools focusing on
  the arts and not having comprehensive
  programming such as basic reading and math
  skills.
• Proponents of vouchers say this could easily be
  handled by setting minimum standards and giving
  standardized tests.
• ______________________________________________as
  the best students leave failing schools for
  better opportunities the worst students remain
  reducing educational quality.
• cream skimming
• Private schools have many school voucher
  applicants but will only take the good students
  and not all students

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Arguments against vouchers continued

• 3. __________________________________________ if
  motivated parents differ from disinterested
  parents along income, race, or ethnic lines you
  will observe a sorting of students along these
  lines.
• proponents of vouchers say the educational
  freedom will result in less segregation as lower
  income students can move to better school
  districts.
• 4. _______________________________________________
  ______________________________________ there are
  cost efficiencies in current school districts and
  much like a monopoly, if you increase competition
  by providing lots of smaller schools the
  economies of scale are foregone resulting in
  higher costs.
• how can a rural area support enough schools for
  adequate competition when there is not sufficient
  demand (children).

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Opponents of vouchers continued

• 5. _______________________________Vouchers are
  based on per pupil spending but this
  disadvantages families with children requiring
  special education
• students with developmental and learning
  disabilities require additional monitoring,
  diagnostic testing, and accommodations. The per
  pupil spending level is not enough to provide
  adequately for these children.
• 6. ___________________________________ many
  private schools have a religious affiliation.
  Many people believe it is unfair and/or
  unconstitutional to spend government dollars on
  religious education.

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School vouchers in practice today

• School vouchers have been used in other countries
  for many years (including Chile, Hong Kong,
  Sweden, Norway, Ireland).
• In most cases, the voucher is
• In some states, it is the average spending
  level per child in the state.
• The school voucher can be used at any qualifying
  private school to fully or partially cover
  tuition expense.
• Much controversy over what schools should
  qualify.
• Heated debate over religious private education
  such as Catholic private schools and separation
  of church and state.

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US Vouchers

• In the US, the first school voucher system was
  done in Milwaukee, Wisconsin in 1990.
• This was a small scale voucher system in which
  families earning income no more than 175 of the
  poverty line could receive a voucher worth 3200
  that could be used at any non-religious private
  school.
• As of 2007, the program has expanded and 15,000
  students in Milwaukee are using vouchers.
• Other areas with vouchers include
• Washington D.C. (called the DC Opportunity
  Scholarship Program)
• Cleveland, Ohio (after much legal battling over
  constitutional issues)
• Florida (Florida Opportunity Scholarship
  Program)allowed students in failing schools to
  attend other schools of their choicedeclared
  unconstitutional in 2005. Still facing legal
  issues and back on the political agenda currently

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Evidence on effectiveness of vouchers

• Evidence is mixed with regard to effectiveness of
  vouchers (measured in terms of educational
  success or higher scores on exams, dropout rates,
  etc).
• Part of the problem is accounting for intangible,
  and often, immeasurable differences among
  students such as ambition, parental influence,
  etc.
• Students that use vouchers are probably more
  motivated than those that do not.
• Also, in some states or voucher areas, private
  school select admits from an applicant pool most
  likely taking the best students.

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Milwaukee voucher program data

• Much of the empirical evidence is based on the
  Milwaukee pilot program for a few reasons
• participating private schools had to accept any
  voucher
• If the private school was oversubscribed
  meaning that there were more applicants than
  open spots then they had to determine admission
  via random lottery
• This means that empirically you could now compare
  those that wanted to use vouchers in two
  different environments private school vs. public
  school without bias
• Control group
• Treatment group

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Early Findings by rouse (1998) and others

• Rouse There was an increase in educational
  success within the treatment group
• An increase in math scores by ____________________
  __that students were in private school relative
  to the control group
• Other measures in reading, etc were not
  statistically different
• Findings in Colombia Voucher Program which has
  over 125,000 students (Angrist et al 2002)
• Students that won vouchers via lottery were
  _____________________________________.
• Students scored higher on standardized tests
• The cost to government was ___________________and
  wages for the winners increased between
  ____________________

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Other types of programs and policies that provide
public school incentives

• _______________________________ schools must
  measure performance of students to ensure they
  are meeting or exceeding educational standards
• (Handshek and Raymond 2004) evidence
• As of 2002, 25 states in US directly linked
  student promotion to the next grade of graduation
  to performance on state and local assessment
  tests
• 18 states rewarded teachers and/or administrators
  for successful student performance on exams
• 20 states penalized teachers and administrators
  for subpar student performance
• Found a direct link between rewards/penalties and
  school performancesizeable improvements in test
  scores

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No child left behind (NCLB)

• This idea of school accountability was formalized
  into US law in 2001 with the No Child Left
  Behind Act of 2001 (President Bush)
• Based on the idea of standards-based educational
  reform
• Each state sets its own standard (assessment test
  and minimum compliance)
• States that do not submit assessment plans and
  outcomes will have their federal funding
  rescinded
• Federal funding for education NCLB increased
  initially from 17.4 billion in 2001 to 24.4
  billion in 2007 (40 increase) in part to pay for
  assessment, to pay for new and improved school
  programming, and to fund reward programs, etc.

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Proponents of nclb

• Suggest that NCLB
• Schools must provide detailed reports to
  parenting on the teacher qualifications in the
  school where their child attends
• Creates common standards among all school
  districts in a state
• Forces schools identify at risk populations and
  target programs at those students
• provides school choice for students in failing
  schools (schools receiving a grade of Fstudents
  can move to a new district)

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Criticisms of no child left behind

• Implication is that teachers narrowly focus
  education on the tested items enabling students
  to perform well on test and not a broad education
• There is empirical evidence which suggests that
  this is the casestudents do well on the
  standardized test but when given an alternative
  test, scores are significantly reduced.
• Jacob (2002) found that in both Chicago and
  Florida school systems many low performing
  students were reclassified as special education
  students or disabled so scores would not be
  counted in the school average.
• Jacob and Levitt (2003) found evidence that
  teachers may cheat (providing answers) if they
  are rewarded financially for improved student
  performance.

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Criticisms of NCLB

• 3. States may actual lower standards to ensure
  school districts meet standards to maintain their
  federal funds
• 4. Talented students may receive less funding and
  funding is shifted to at risk populations
• 5. Less funding for arts and elective courses as
  more resources are focused on the basics of math,
  science, and reading.
• 6. NCLB requires military recruiter access to
  schools facilitating military enrollment

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Charter schools and magnet schoolsschool choice
alternative

• ______________________ are small, independent
  schools that are not subject to many of the
  regulations imposed on traditional public
  schools.
• Operated by private enterprises with own internal
  regulations
• They do not have to follow same restrictive
  hiring procedures for teachers
• More flexibility in curriculum, hiring and firing
  of administrative staff.
• Charter schools often have a particular
  focuseither in terms of the learning objectives
  or the student demographic
• Ex Beardstown, IL Charter School for English as
  a Second Language Students

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Magnet schools

• _______________________ special public schools
  set up to attract talented students or students
  interested in a particular subject or teaching
  style
• School of the arts
• Schools of Science and Technology
• Magnet schools are still public schools and must
  abide by administrative procedures and policies.
• Empirical evidence of educational improvement in
  magnet schools is mixed or inconclusive.
• Most studies find no improvement or no
  statistically significant improvement
• Where small gains in improvement exist is when
  there is a large degree of competition.