Slide #1.

Part 4 The Economics of Education
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Slide #2.

Introduction The US education crisis? US and a sample of world countries What? Input output relation Comprehensive analysis of the crisis need to address the following areas: Who provides education? Analyze the market for education Rationales for intervention Government failure How is education financed?
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Slide #3.

Introduction How significant are school resources to achievement Education production function Role of: peers, teachers, home environment, curriculum, resources Is there an achievement gap within the US? Inner city v suburban schools? Why? Significance of externality from peers Effect of urban segregation on the gap and the average achievement Sheff v O’Neil and reform measures 
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Slide #4.

Education as a Publicly Provided Good K-12 education is delivered in a system of primarily public education 90% of school aged children in the US attend public schools
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Slide #5.

International Comparison of Education Expenditure Country Expenditu Expenditu re re as % /student of GDP ($) United States 8855 3.5 Norway 8476 3.9 Italy 7218 3.2 Australia 6894 3.9 Sweden 6339 4.9 Japan 6266 2.7 Netherlands 5912 3.2 International Comparison of Education Expenditure
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Slide #6.

Free Market for K-12: Demand side No public schools and no regulation requiring school attendance Value placed on education: Additional earning to the individual as a result of extending education Better decision making Interpersonal relationships Pure satisfaction from learning
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Slide #7.

Free Market for K-12: Supply Side On the supply side we assume: The market is perfectly competitive No externalities in production (MSC=MPC) Constant marginal cost
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Slide #8.

Market for K-12 $ Supply (MC) $5,000 Demand 0 Q equilibrium Quantity
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Slide #9.

Externalities from Education Positive externalities in consumption: the benefits from education spill over to a third party Positive externalities from: More rapid economic growth Better functioning democratic process Better safety and hygiene Greater charitable contribution Better decision making and more efficient functioning of markets
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Slide #10.

Externalities From Education Consumer 1 1 1 10 1 Marginal social benefit > Marginal private benefit
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Slide #11.

Magnitude of Spillovers The absolute size of the positive externality declines as a student progresses through K-12 education. Evidence: The greatest externality occurs during the earlier years of education What does that imply about the shape of the MSB curve?
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Slide #12.

Externalities From Education $ MSB 2 $5,000 0 Q equilibrium • The spillover effect is relatively small. • The MSB Supply (MC) is given by MSB2 • The market for education Demand is efficient Quantity
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Slide #13.

Externalities From Education $ $5,000 0 • The MSB 1 spillover effect is relatively large. • The MSB Supply (MC) is given by MSB1 • The market for education Demand is Quantity Q equilibriumQ optimal inefficient
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Slide #14.

Externalities From Education $ MSB 1 A subsidy of $1000 Supply (MC) $5,000 Supply (MC) with the subsidy Demand $4,000 0 Q equilibriumQ optimal Quantity
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Slide #15.

Imperfections in the Capital Market A child’s education as an investment Return later in the child’s life Not possible to use human capital as collateral to secure loan to finance education Financial institutions offer loans at a premium The higher than social cost of funds discourages spending on
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Slide #16.

Absence of a parent-child contract A child consumes education when he does not have the means to pay Parents more likely to finance the education of a child if the child commits to repay them in the future No such contract Parents are likely to underinvest in a child’s education
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Slide #17.

Rationale for government provision Does the need to ensure the provision of quality education justify government intervention? No Given the availability of information, the market will supply quality goods. Demand will adjust to provide quality education. If information is not available,
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Slide #18.

Rationale for government provision Do the positive externalities from education justify government intervention? Yes A subsidy that equates the MSB with the marginal cost can correct the market failure However, the existence of the externality does not necessitate public provision of education
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Slide #19.

Rationale for government provision Does the need for Social and Cultural Cohesion justify government intervention? Yes US population is very diverse The need to share common experience to avoid breaking apart along those differences K-12 system as a melting pot Builds a shared moral
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Slide #20.

Rationale for government provision Does the need for Social and Cultural Cohesion justify government intervention? A private education market will lead to Schools that do not necessarily perpetuate important cultural values, e.g., tolerance, equality Provision of a differentiated product: schools distinguished by a cultural, racial or religious character
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Slide #21.

Government failure Hoxby (1996) analyses the challenges of financing public schools Intervention in the education market does not necessarily result in the optimal consumption of education Inefficiencies typically present with government provision Free riding: as with any publicly provided good and especially by parents who do not have children Moral hazard: individuals will free ride when the government commits to providing a minimal amount of education- safety net
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Slide #22.

Centralized v. Local Finance How does the government finance education? Local finance  Taxes collected from a certain district  Used to finance local public good  Tax rate determined by the district’s median voter Centralized finance  Taxes imposed on statewide or nationwide tax base  Redistribution across states: A district gets a share of the tax money, not necessarily equal to money collected from that district  Tax rate determined by the state’s median voter  A district has little control over tax rates or provision of public good
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Slide #23.

Advantages of Local Finance Efficient: in combination with the Tiebout (1956) process individuals choose the tax rate and size of public good to match their preferences by moving across districts- no under provision Reduces capital market failure: parents finance 12 years of schooling through lifetime taxes Solves a principal (tax payers)-agent (school administrators)model Households unable to verify school outcome Property values direct measure of unverifiable school outcome
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Slide #24.

Possible Problems of Local Finance Fiscal spillovers: When taxes based on property values, people in low valued houses can free ride the median voter chooses a level of school spending that is lower than if the district was homogenous Answer: Can be solved using zoning regulation Results in human capital segregation Centralized finance leads to human capital integrated schools Answer: People will sort themselves Tiebout style if there is high correlation between
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Slide #25.

The Education Production Function Empirical evidence indicates that: increasing school spending has a modest impact on achievement. Urban schools spend more per student than suburban schools yet the achievement gap persists Questions: What is the nature of the relationship between school spending and achievement? What variables determine achievement? Do scores capture educational output?
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Slide #26.

Education Production Function How to measure achievement? Lifetime income Scores on standardized tests Graduation rates
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Slide #27.

Education Production Function Factors affecting achievement: H: Home environment P: Peer group C:Curriculum E: Education resources T: Teacher quality Marginal gains in achievement will decrease with an increase in a single factor, holding other factors constant
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Slide #28.

Empirical Evidence • Home environment: • Depends on parent income and education • Educated high income parents: • encourage studying, provide extra help and discourage distracting • • • • activities offer needed medical care: 50% of low income children have vision problems that interfere with their education Offer stable housing: 30% of low income children attend at least 3 different schools by third grade- only 10% for middle class kids Offer safe housing Nurturing preschool environment: Shonkoff and Phillips (2000): early childhood development has a strong impact on the ability to acquire skills which amplifies differences in school achievement
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Slide #29.

Empirical Evidence • Externalities from the peer group • Favorable peers are smart, motivated, not disruptive • Evidence that peer effects most important for grades 5-12 • Placing a high achiever in a class of low achievers: • Sund (2009) shows that low achievers have the most to gain so class average increases • Placing a high achiever in a class of medium achievers: • Burke and Sass (2008) shows that class average increases • China, Ding and Lehrer (2007) show that medium achievers gain more (suggesting an increase in class average) than low achievers from the presence of a high achiever (which results in a decline in class average)
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Slide #30.

Empirical Evidence • Teacher quality: • Significant variation in quality • Quality measured by: student scores, education, experience and communication skills • productive teachers have superior communication skills • Graduate degrees don’t significantly affect teacher quality • Hanushek (2010) and Chetty et. al.(2010): Replacing an average teacher with a superior teacher increases student score 50 th percentile to 58th and increases lifetime earning/student by $21,000 • Hanushek and Rivkin (2010): if we replace the bottom 8% of teachers by average teachers, test scores increase by 45%, eliminate international achievement gap, increases GDP by $112 trillion
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Slide #31.

Empirical Evidence • Boyd (2005) • a “draw of home” tendency • In cities more openings than qualified applicants means the need to import suburban raised teachers. Only lower quality suburban teachers accept • Lower quality of school building, noise, ventilation • In cities higher teacher turnover
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Slide #32.

Empirical evidence • Class size • Smaller classes result in higher test scores • Largest benefit to minority groups • Krueger (1999): reducing class size by 1/3 for 4 years: • Extra cost $7400/ student • Increase in lifetime earning per student $9,603 for men and $7,851 for women • Benefits and costs within the same ball park
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Slide #33.

Other Empirical Evidence • Coleman (1966): the first cited. Variation in school resources (teacher student ratio, spending per student, library) has an insignificant effect on the gap between while and black children • Literature on effect of spending on scores has mixed results: • Krueger (1997): smaller classes matter to minority • Hanushek (1997): no significant effect • Hoxby (2000): using data from Connecticut also finds no effect.
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Slide #34.

Other Empirical Evidence • Rothstein (2004) examines inequality in school spending: • Interstate Inequality: Range: 159% of the average in New Jersey to 61% in Mississippi. Variation in states ability to pay • Federal funds 7% of school expenditure, limited ability to equalize spending • Inter district inequality: • due to property tax system. • NY, WY, IL have the largest gaps. • State funding sometimes used to equalize gaps: for example, MA spends $8, 416 in high poverty areas and $7,946 in cities and towns with fewest poor
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Slide #35.

Achievement gap • Due to the challenges facing urban schools a gap exists between rich and poor, white and minority: • According to Standard and Poor (2006) reading proficiency on NAEP exam in 2005: • Asians 39%, whites 37%, Blacks 11%, Hispanics 14% • Economically disadvantaged 15% compared to 38% those not • According to Urban Institute (2004), high school graduation rates: • Suburban 73%, central city 58%, • largest gap in New York, lowest rates for minority
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Slide #36.

Reform: History • The gap is caused by housing segregation, location and local funding • De jure segregation up to 1954 • laws required separation of black and white children across schools • Brown v. Board of Education • Court overturned the precedent requiring integration • De facto segregation: • Schools continued to be segregated even in the absence of segregation laws
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Slide #37.

Reform: School structure • Concerns about the quality of education • By 1970 greater equity in distribution of school resources • Concern about gap between US and other countries: • National Commission on Education Excellence concerned that the US falling behind due to teacher quality, training, not enough homework, length of school day • Need for competition: monopoly of local schools results in very little improvement in quality
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Slide #38.

Reform: Competition • Magnet Schools • Specialized curriculum, new approach to learning • Tacoma 1968 and Boston 1969 • Accepted by courts to address issues of segregation • Charter schools • Established privately • Funded by government • St Paul, Minnesota 1992
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Slide #39.

Reform: Accountability • Standards movement: • Emphasized lack of accountability • No Child Left Behind Act • School districts develop criteria to measure performance • Test each year • Identify schools needing improvement • Sanctions to failing schools: losing students, changing management, losing funds
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Slide #40.

Reform: Accountability • Problems with No Child Left Behind Act • Output of the education production function • Standardized tests do not adequately test learning • Teaching to the test • Limited budgets: improvement to test scores achieved by cutting funding from extracurricular activities • Scores also depend on student background and social factors • Harder for inner city schools to meet the standards
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Slide #41.

Reform: School Choice • Allow families to choose beyond the what is assigned • Bring elements of the free market into education • Families can choose • Competition between schools improves quality • Problems with school choice • Who are the choosers? • Self selection: educated and wealthy families will exercise the choice • Access to information • Can afford to pay extra under a voucher • Those left behind • Choice based on proximity to residence or work or based on composition of student body • Introduces more divisions in society
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Slide #42.

Effectiveness of the Reform • Effect on: • International gap • Inner city suburban gap • Empirical Evidence: • Hoxby (2004): Charter students more proficient than student attending district school • 3.8% in reading • 1.6% in math • Carnoy et al. (2005) and Roy and Mitchell (2005) find no significant difference: • Control for income and race • In general mixed results about the success of charter schools
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Slide #43.

Effectiveness of the Reform • Empirical Evidence: • Gil et al. (2001) finds small gains to minority student from voucher program • National Center for education statistics: children in public schools do as well after controlling for demographic variables • Blueston (2008): parental background and community factors are significant
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Slide #44.

Reform
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