Chapter 1

The Economics of Education

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 Economics of Education
❑study of the allocation of resources in the education sector
and the outcomes produced by these investments.

❑examines the cost, financing, and efficiency of education

systems and the impact of education on individuals and
society. Key topics within the economics of education
include:

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 Economics of Education
Key topics within the economics of education include:

✔Human capital theory: the idea that education is an investment in

future income and productivity.
✔Education production functions: the relationship between inputs
(such as funding, teachers, and technology) and outputs (such as test
scores, and graduation rates).
✔Education finance: the study of how education is funded, including
government spending, private investment, and student loans.
✔Labor market outcomes: the impact of education on individuals'
wages, employment, and lifetime earnings.
✔Education policy: the design and implementation of policies aimed at
improving education outcomes and access.
 Education as Human Capital
•Education = Investment in human capital & Investment = Risk

•Education is responsible for social and economic development

•Capital deteriorates with inactivity

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 Creation of Wealth and Education
•Elements in the creation of wealth (labor, physical capital,
technology), are enhanced through education

•Educated workers are more productive

•All areas of resources are refined through education

•Human capital—greater productivity in management

Public sector Human Capital

Private sector

Education

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 Education: An Important Industry
•Education is the country’s largest industry

•There is a positive relationship between education and economic growth

•Economic philosophies affect fiscal matters and the educational program

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 John John
Milton
Karl Marx Maynard Kenneth Adam Smith
Friedman
Keynes Galbraith
Government
Communist Liberal Conservative Capitalist
Intervention
The invisible
The
hand of
government will
competition will
help the Government
run the
economy in interventions
economy in a
depression or The have hampered
Central natural way.
recession by government is a programs.
government has Government
public works dominant factor Should reduce
total control, should govern
projects, in society. Limit bureaucracy
Role of sets policy and only – no
stimulus overproduction who are free to
Government goals in all government
packages, by the private choose because
aspects of interference in
bailouts, etc. sector. Provide people without
society, strong business or
Deficits affluence for all bureaucratic
bureaucracy trade, just
accumulated citizens. influence create
preserve law
thereby will be a better quality
and order,
repaid during of life.
defend the
good economic
nation, enforce
times.
justice.
 Marx Keynes Galbraith Friedman Smith
Government
Communist Liberal Conservative Capitalist
Intervention
Education is
one of the
essential
Government
government
Education is the Education is over-governs
Free public services to
inculcation of vital for education.
education, is make
the technical Voucher system
controlled and capitalism
incomprehensib advances and for education.
financed by a work, and
Educational le into the growth. Education is
centralized competition
Perspective indifferent by Education must essential in
government. between
the incompetent be encouraged maintaining
Trains in the schools. Local
and provided for future free enterprise,
value system of education
by the research and political
the government. control,
government. development. freedom, and
compulsory
open economy.
education at the
elementary
level.
 Marx Keynes Galbraith Friedman Smith
Government
Communist Liberal Conservative Capitalist
Intervention
Taxes should
The public
The private reflect the
economy is
economy is ability to pay,
Progressive tax starved, private
starved, and the not arbitrary,
to redistribute economy is
Highly public economy should be
wealth so the bloated. Tax
graduated is bloated. Tax convenient and
Taxes poor can spend the affluent
progressive tax reform efficient,
more and the society (private
on income. encourages Needed to
wealthy save sector) more to
investment in provide for
less. provide needed
the private essential
public services,
sector. government
education, etc.
services.
 A Public Sector Responsibility
•Government through taxation produces education services
•Private sector organizations respond to consumer demand

•Education--a political responsibility at three levels of government

through taxation

•Federal system-public education designed to produce equity

Private sector Public sector

₱₱₱
Taxation

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• Low-end—human effort devoted to essential material goods

• High-end—human effort devoted to education and non-essential goods

and services

•As educational services increase, economic productivity and wealth

increase

•Educational system—result and determinant of social and economic

progress

•Education produces non-free services

Producer’s good—human capital
Consumer’s good—the purchaser of education and wants as a
consumer

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 Stimulates Economic Growth

•Education is important to increases in economic productivity

•The scope of educational services is determined by
government officials
voters’ experiences
school community
taxpayers
those with no direct relationship to education interest group

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•Marginal money principle
marginal utility—pleasure or satisfaction the consumer
achieves
diminishing marginal utility—utility of additional units of a good
or service decreases as additional units consumed
marginal money—money better spent on some other goods or
services

•Point of diminishing returns

additional expenditures yield very little or no additional

educational returns

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 Economic Benefits of Education
•Benefits
range of job opportunities
job security
taxes paid to the state
life expectancy
averages earnings

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•Increasing expenditures and the economy
human capital more important than natural resources in wealth
creation
high education development overcomes lack of natural
resources
poor education system—lower individual economic
productivity

•Expenditures benefit individuals and society

social mobility, higher status, increased appreciation for arts

and culture, increased participation in the democratic
process
family, neighborhood, business, society, and culture benefit

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 Non-economic Benefits of Education
•Free democratic society—well-informed and responsible citizens
•Schools — source of moral and ethical values
•Preservation of nation’s culture and people’s sense of identify
•External benefits—justify taxation to finance education
healthier society
more informed electorate
more productive labor force
raised standard of living
enhanced economic growth

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•Exclusion or free rider principle
exclusion principle—the ability of the consumer to enjoy
exclusively a good or service
free riders—garnering benefits without spending income
•Externalities justify ability principle
costs of education paid by all, based on the ability to pay
wealthier pay more

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 Taxation and Education

•Benefit system—tax based on benefits received

•Ability principle—taxes based on ability to pay

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 Cost-Quality Relationship to Education
•Problems with establishing this relationship
lack a definition of high quality that is measurable and
acceptable to all concerned
goals of education vary from time to time and place to place
•Research limitations
many variables contribute to student achievement, not just
spending

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