Chapter 11: Education

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Chapter 11

Education

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter 11: Education

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Introduction

What schools do

Elementary and secondary education

Higher education

Chapter 11: Education

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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:

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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

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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

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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

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The Optimal Quality of a Public School

• Higher quality is higher cost per child

• Social optimum is where MC = ∑MBMBY

∑MB

Quality

Figure 11.1

$600

$400

MC

$200

8 10 12

MBO • Social optimum is reached when the cost-share (tax price) is in the same ratio as the MBs.

• Each family has different MBs

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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.

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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:

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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 Price District’s Price Cut

Low 2.0 33% 67%

Middle 1.0 50% 50%

High 0.1 91% 9%

m is the state matching grant rate

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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%

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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

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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?

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The Costs and Benefits of Higher Education

B = benefits

F = foregone earningsAge

Rest-of-life earnings with college

Rest-of-life earnings without college

18 22

B

F

T T = tuition

Figure 11.2

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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

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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

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Summary

What schools do

Elementary and secondary education

Higher education

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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