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 McGrawưHill/Irwin â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved Chapter Outline • • •   INVESTMENTS IN HUMAN CAPITAL SHOULD WE SPEND MORE? SCHOOL REFORM ISSUES COLLEGE AND UNIVERSITY EDUCATION McGraw­Hill/Irwin â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved 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   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved 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   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved 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   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved 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   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Modeling External Benefits Tuition What  Schools  Get S T’ Social Benefit T* External Benefits D What Parents Pay   McGraw­Hill/Irwin S*   S’ Enrolled Students © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved 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   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved R e a l S p e n d in g ( $ ) More Per Student Spending 1996 Dollars Real Spending p 8000 7000 6000 5000 4000 3000 2000 1959 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 Year   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Lower Student-Teacher Ratios Student-Teacher 26 R a ti o 24 22 20 18 16 1965 1970 1975 1980 1985 1990 1995 2000 Year   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved M a t h a n d V e rb a l S A T s Flat to Declining SATs SATs Math and Verbal 550 540 530 SATM 520 510 SATV 500 490 1965 1970 1975 1980 1985 1990 1995 2000 Year   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved P e r c e n t a g e o v e r w / H ig h S c h o o Higher High School Graduation Rates High School Grad by race 100 80 60 40 20 1940 1960 1980 1987 1989 1991 1993 1995 1997 1999 Year   McGraw­Hill/Irwin   White Black Hispanic © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved 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   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved 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   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved The Education Production Function Test Scores Education Production Function The flat of the curve.  The argument is that in this range more spending does not increase scores   McGraw­Hill/Irwin   Teacher Quality/Quantity © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved 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   McGraw­Hill/Irwin â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved College and University Education Costs are higher than K-12 – Teachers spend less time in the classroom • 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   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved P e r c e n t a g e w it h C o lle g e D e g r More College Graduates College Graduat by Race 30 25 20 15 10 1940 1960 1980 1987 1989 1991 1993 1995 1997 1999 Year White   McGraw­Hill/Irwin   Black Hispanic © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved 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   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved  ... student-teacher ratios – Flat to declining SATs – Increasing high school graduation rates   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved R e a l S p e n d in g.. .Chapter Outline • • • •   INVESTMENTS IN HUMAN CAPITAL SHOULD WE SPEND MORE? SCHOOL REFORM ISSUES COLLEGE AND UNIVERSITY EDUCATION McGrawưHill/Irwin â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved... McGraw­Hill/Irwin   White Black Hispanic © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Cautions Against Quick Conclusions • Much of the increased spending has gone for – Noninstructional