Lecture Issues in economics today - Chapter 25

The main contents of this chapter include all of the following: Marginal utility, the law of diminishing returns, total utility, maximizing utility, the water-diamond paradox, consumer surplus.

Chapter 25

Education

Chapter Outline

• INVESTMENTS IN HUMAN CAPITAL

• SHOULD WE SPEND MORE?

• SCHOOL REFORM ISSUES

• COLLEGE AND UNIVERSITY

EDUCATION

Investments in Human Capital

• Human Capital: the ability of a person to

create goods and services

• An education is an investment like any other

– You incur costs early – You reap rewards later

• Any investment only makes economic sense

if the net present value (the present value of the benefits minus the present value of the costs) is positive

Why “Free” Public Schools are

not “Free”

• Taxpayers pay $389 billion in taxes to

support the system.

• Some states and school districts have

fees (such as textbook rental) that parents must pay.

Analyzing the Education Decision

• If parents had to pay the entire cost of K-12

education and chose not to send their children to school they would still incur daycare costs for their smaller children

• Parents would then compare the present

value of benefits to the present value of the tuition costs minus daycare costs

Why “Free” Public School Makes Economic Sense

• The external benefits (the benefits to the rest

of society that result from a child being educated) are such that the efficient price is zero

• External benefits include

– the social stability that is enhanced by providing opportunity for all to succeed.

– the more intelligent voting population.

– the greater tax base associated with higher incomes.

Modeling External Benefits

Social Benefit External Benefits

0

Enrolled Students D

S Tuition

T*

S*

T’

S’

What 

Schools 

Get

Should We Spend More?

• What we get for our $300 billion in tax

money

– More real spending per student – Lower student-teacher ratios – Flat to declining SATs

– Increasing high school graduation rates

More Per Student Spending

1996 Dollars

2000

3000

4000

5000

6000

7000

8000

19591965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998

Year

Real Spending per pupil

Lower Student-Teacher Ratios

16

18

20

22

24

26

1965 1970 1975 1980 1985 1990 1995 2000

Year

Student-Teacher Ratio

Flat to Declining SATs

490

500

510

520

530

540

550

1965 1970 1975 1980 1985 1990 1995 2000

Year

SATM SATV

SATs

Math and Verbal

Higher High School Graduation Rates

0

20

40

60

80

100

1940 1960 1980 1987 1989 1991 1993 1995 1997 1999

Year

High School Graduation Rates

by race

Cautions Against Quick

Conclusions

• Much of the increased spending has gone for

– Noninstructional spending (e.g.Janitors, secretaries, administration)

– Special education spending (more than 10% of students now qualify for special services)

• Some of the decline in SATs comes from

more (and less academically prepared) students taking the exams

• Some of the increase is graduation rates

comes from GEDs, and social promotion

The Economic Literature on

Education Spending

• Economists have studied the relationship

between student success and spending The majority show little relationship

– Measures of success

• Graduation rates, standardized test scores

– Inputs

• Student-teacher ratios

• Teacher degree attainment

• Teacher salaries

The Education Production

Function

Test Scores

Teacher Quality/Quantity

Education Production Function

The flat of the curve. 

The argument is that in this range more spending does not increase scores.

School Reform Issues

• The public school as a monopoly

– Lack of competition makes all monopolies less cost- and quality-conscious.

• The existence of tenure (the job protection for teachers with experience) and the lack of

merit pay

– Tenured teachers can not be fired for poor teaching and good teachers are rarely paid more than poor ones

• Private vs Public Education and Vouchers

– Creating competition would stimulate cost and quality consciousness Evidence is mixed.

College and University

Education

• Costs are higher than K-12

– Teachers spend less time in the classroom

• 6 to 12 hours per week

• Spend time on research, committees, keeping

up with the latest in their fields.

– Equipment and lab costs are substantially higher

More College Graduates

0

5

10

15

20

25

30

1940 1960 1980 1987 1989 1991 1993 1995 1997 1999

Year

College Graduation Rates

by Race

What is a College Degree

Worth

• Present Value of Costs

– Opportunity costs of lost work time – Tuition

– (not living expenses…you have to eat)

• Present Value of Benefits

– Increased expected earnings over a lifetime

• Net Present Value

– Estimates vary between $300,000 and $500,000 for the positive net present value