Essential guidance on economics exam technique:
A2 Markets & Market Systems
Market Failure – Universities and Tuition Fees
The introduction of tuition fees for students in England and Wales has been controversial. It raises important issues about the economics of higher education – some of these issues are raised and evaluated in this note.
Market failure in education
Market failure occurs when markets operating without government intervention, fail to deliver an efficient or optimal allocation of resources - Therefore - economic and social welfare may not be maximised – leading to a loss of allocative and productive efficiency (i.e. welfare losses for society).
Market failure exists when the outcome of markets is not efficient from the point of view of the economy. This is usually because the benefits that the market confers on individuals or firms carrying out a particular activity diverge from the benefits to society as a whole (i.e. there are externalities not taken into account within the market). This is particularly relevant to the concept of education as a merit good
The idea of positive educational externalities is that the benefits of individually acquired education may not be restricted to the individual but might spill over to others as well, meaning that there will be macroeconomic advantages from a higher level of education spending and attainment.
For example, there is compelling evidence that human capital increases productivity and thereby increases an economy’s trend rate of growth and international competitiveness. Education is found to yield additional indirect benefits to growth for example by stimulating physical capital investments and technological development and adoption across many different industries (creating the potential for gains in dynamic efficiency)
The free “spill-over effects” of improved educational provision can be said to take education away from being purely as a merit good and more towards meeting the characteristics of a public good.
The social returns to increasing the average length of time that people spend in education depend in part on the stage of economic development – recent studies suggest that an expansion of tertiary/higher education is the most important for growth in countries such as the UK.
Markets can also fail when the individual or firm does not have sufficient information to recognise the future returns from undertaking an action – again this is relevant to decisions that individuals take as to how much education they should “consume” or “purchase” at different stages of their life. Many young people are myopic when making university and degree course decisions. Or they may be averse to taking on debts even though it might be in their long-term financial interest to do so. In this case, there might be an economic case for the government to adopt a “paternalistic” view on what is best or for younger people.
Markets can generate what is perceived to be an ‘unacceptable’ distribution of income and too high a level of social exclusion where people on low incomes are denied access to essential goods and opportunities considered ‘normal’ by a society. Education comes into this category – not least on the issue of whether students should make a financial contribution to the cost of their own tuition when they are in higher education.
Merit Goods and Market Failure
A merit good is a product that the government believes consumers undervalue and under-consume because of imperfect information. A merit good is deemed to be ‘socially desirable’ and also ‘better’ for a consumer than the consumer realises – a value judgement is involved whenever we talk of merit goods.
How can the value to society of a well educated and more skilled and productive work force be estimated both in the short term and the long run?
The Private and Social Benefits of Education
There is no such thing as a free lunch. Higher education involves costs – the main issue is really how best it should be funded. Clearly there are many normative judgements involved – but we should also try to bring economic arguments into the discussion. A recent research piece by the Institute for Fiscal Studies made the situation clear:
It is important to be clear that higher education is never free, whether the costs are met upfront by students, later in life by graduates or in an ongoing way by taxpayers in general. Altering the system of HE finance changes the incidence and the timing of payments but does not change the fact that the cost of university education must be paid for in one way or another.
|Author: Geoff Riley, Eton College, September 2006|
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