AThe American public education system has long been a ...



Principles of Economics

by N Gregory Mankiw

The Video Series script

Principle #7 Governments Can Sometimes Improve Market Outcomes

The American public education system has long been a model for the free world. Why is our government concerned with education? Wouldn’t the system work better if left to the free market?

There are two reasons why the government stays involved in education - the same two reasons that motivate it to intervene in other markets. The first is to promote equity, and the second is to promote efficiency.

The original intent behind the establishment of a public school system was to promote equity for all citizens. Historically, private schools have offered an excellent education. Unfortunately, this education is expensive and therefore is out of the reach of many citizens.

The public school system was established to address this inequity by offering a reasonably standardized curriculum with equal access to all. Therefore, all students can gain the opportunities that education makes possible.

Primarily viewed as extending from kindergarten through the twelfth grade, this system also reaches into the higher education years with community colleges and state universities.

In addition, the government assists higher education through various policies which help students to afford attending private and public institutions. These programs include Pell grants, student loans and government sponsored scholarships, which make higher education more affordable to a large number of citizens.

Dale’s education reveals the role of government action in promoting equity and efficiency.

For example, a few years back, Dale’s public high school received a Department of Education grant to build a computer lab with Internet access. Computer labs in elementary and high schools ensure that all students have a chance to learn how to use computers.

This program not only gave Dale access to the information super-highway, it also helped to ensure that his public school would be able to give him skills equal to the private school graduates. It did this by allowing the school to offer a program that only the private schools had previously been able to afford. In this way, the government-funded computer lab helped to equalize the opportunities available to citizens.

When he enters college in the Fall, Dale will be taking pre-med courses to prepare himself for a career in medical research.

Dale will finance his education through a series of government-sponsored loans, grants and tuition tax credits. These government programs are necessary because many banks do not give student loans. These private institutions fear that students will be unable to pay back the loans once they leave school.

The government also wants the loan to be repaid but knows that society receives other benefits from Dale’s education through positive externalities.

A positive externality occurs because the benefits of one person’s education extend to other individuals in society. Since the market does not take account of these externalities, and so does not provide a sufficient level of education, there is a market failure. These externalities are the second reason that governments intervene to promote education.

Dale will benefit directly from his own education, of course. For example, in a few years Dale might graduate from medical school and get a high paying job as a medical researcher.

He might make important discoveries. By increasing knowledge, other researchers will build on his discoveries. Because of this externality to knowledge, society’s benefits exceed Dale’s direct benefits.

Although Dale may enjoy fame and fortune from these discoveries there are benefits to society above and beyond his private gains.

Dale’s education also means he will make informed decisions at the ballot box which will help to give society a better government. This is another positive externality.

His education will enable him to make better choices when purchasing products, thus allowing the market to operate more efficiently. Again, another positive externality from his education.

All of these possibilities imply the social benefits from Dale’s education exceed his private benefits from that education.

This applies to society as a whole. An educated society is likely to be a better governed society. Educated individuals will do a better job of choosing presidents, senators, and mayors. An educated society will be a society with less crime and less social unrest.

The government’s assistance in securing the best possible education for Dale is more than a hand-out to the young man. Education benefits not just those educated but spills over to everyone in society.

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