4-1COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

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Public vs. Private Schools

• Public schools– Operated by government and financed by tax

revenue

• Private schools– Not operated by government and mainly

financed by student tuition

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Benefits of Education• Private benefits go to student and student’s family

– Able to earn higher wages– Less likely to be frequently unemployed– More likely to find a job that is intellectually rewarding– May be exposed to wider variety of aesthetic experiences that

enrich life

• Also creates benefits for society– Educated citizens more likely to vote and participate in public life– Have more productive skills and contribute more to economy’s

output– Earn more and may pay more income taxes– Less likely to go on welfare and less likely to commit crimes

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Externalities• Costs or benefits of economic activity that spill

over onto rest of society– Can be either negative or positive

• Positive externality provides benefit to society: spillover benefit

– Classic example is education

• Negative externality imposes cost on society: spillover cost– Classic example is pollution

• Tend to create inequity

• Cause society’s resources to be inefficiently allocated– Improper allocation of resources is an example of

inefficiency

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Education’s Spillover Benefits

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Global Comparisons of Educational Spending

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Global Comparisons of PrimaryEducation Completion Rates

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Educational Attainment in the United States

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Financing Public K–12 Education

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Property Taxes• Local government spending on K–12

education heavily financed by local property tax– Creates a problem of many underfunded

schools in our nation and poor education in these schools

– Amount of property taxes that can be collected to support schools depends on tax base and tax rate

• Tax base to support inner-city schools is relatively small compared with tax bases in suburbs

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State Aid

• Meant to enrich and equalize education within a particular state

• Intended to provide more equal funding and educational opportunities among rich and poor communities– Heavy reliance on local property tax to fund

K–12 education creates inequities too great to be resolved by state aid

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The Quality of K–12 Education

• As a result of poor test results, high dropout rates, differential access to quality schools, and disparities in funding of suburban versus inner-city schools, our nation has begun to debate issue of education

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Global Comparisons of Primary Education Pupil per Teacher Ratios

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Proposals for Improving K–12 Education

• Two most common types focus on either:

1. Increase in competition among schools– Charter schools– Magnet schools– Vouchers

2. Reform of tax system that supports public schools– Property tax reform– Federal and state funding

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Charter Schools• Public schools that operate with freedom from

many regulations that apply to traditional public schools

• Charter that establishes school is a performance contract detailing the school’s mission, program, goals, students served, methods of assessment, and ways to measure success– Many charters are granted for three to five years

• Typically sponsored by state governments or local school boards

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Magnet Schools

• Public schools that focus on some particular type of curriculum in an attempt to excel in that aspect of education

• Money for running schools depends on enrollment

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Vouchers• Each student is given a voucher for amount of

money to apply toward tuition in qualified public or private schools

• Student’s family chooses school it likes best– If parents are satisfied with child’s public school, they

use voucher to keep child in that school– Parents dissatisfied with local public schools can

enroll their children in private schools and tuition can be paid with voucher

• Funding withdrawn from poorer-quality schools and transferred to better schools through vouchers

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Opposition to Charters, Magnets, and Vouchers

• Although these alternatives provide more competition in our nation’s schools, many believe these programs will endanger our existing public school system

1. Popular charters, magnets, and private schools must often close enrollment early because they run out of space

2. Better schools may be located some distance from the student’s home, making it difficult or impossible to arrange transportation

3. Consumers of education (students and their parents) may not be sufficiently informed about educational options for any of these programs to result in an efficient market

4. Some argue that vouchers for private religious schools violate our nation’s separation of church and government

5. These programs shift funds from public schools to private ones

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Property Tax Reform• Encourages economic development as

well as provides more equality in educational opportunity by replacing the property tax with a blend of tax sources to finance education– Involves some redistribution of funds from rich

to poor districts

– Property taxes to finance education are not fully eliminated, but locally determined rates are replaced by statewide tax rates that vary for different types of property

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Federal and State Corrective Funding

• An alternative to property tax reform is to shift the major burden of financing public education to state and federal government levels– Done through state equalization measures

and federal grants to poor school districts– Property taxes would provide little if any

financing for public schools– Problem of differential property tax bases

would disappear

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Merits and Problems of Federal andState Corrective Funding

• Merits:1. Unequal funding between poorer and richer school

districts would be eliminated

2. Larger expenditures for disadvantaged children could be used to address their needs for the highest possible corrective educational efforts

• Problems:1. State governments have been experiencing

worsening budget crises; therefore, most states are in no shape to expand funding of public education

2. Common view that local citizens and school boards should be making decisions involving their schools

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No Child Left Behind• Four key principles:

1. Stronger accountability for results2. Greater flexibility for states, school districts, and schools in the

use of federal funds3. More choices for parents of children from disadvantaged

backgrounds4. An emphasis on teaching methods demonstrated to work

• All third and eighth grade students required to take tests annually in reading and math– Data disaggregated for students by income level, race,

ethnicity, disability, and limited English proficiency

• Requires schools to report on safety issues and insists on English-language proficiency for non-English-speaking children

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Public and Private Higher Education

• Consists of:– Colleges– Universities– Community colleges– Technical-vocational schools

• Average cost of a private institution is over 2½ times average cost of a public institution– Public schools generally have lower tuition because

state governments subsidize public universities

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Higher Education as an Investment in Human Capital

• Investment in human capital

– Spending designed to improve productivity of people

• Government data show that earnings increase as education increases

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Direct vs. Indirect Costs• Direct costs

– Actual paid expenses

• Indirect costs

– The opportunity costs of forgone earnings

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Investment in Human Capital Theory

• Criticized for being overly simplistic and for its implicit assumption that the only reason we obtain an education is to increase our lifetime earnings

• Has considerable explanatory power, however, by offering an explanation for the young age of most people in college1. Young people have many years to earn higher salaries that

result from education– Increased earnings over their lifetimes are therefore greater

2. Young people will have smaller opportunity costs than older workers who have some labor market skills and who probably earn at least slightly higher wages

• Helps explain effects of financial aid to students

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The Public Postsecondary Education System

• Consists of:– One major research institution (the flagship)

• A major, doctoral degree-granting institution

– A number of comprehensive universities• Four-year teaching institutions that may offer a few

master’s degree programs

– A number of community colleges• Two-year schools that offer associate’s degree

programs and serve as feeder institutions to the comprehensive schools

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State Government Support of Public Higher Education

• Education is subsidized by state government

• Historically, subsidy has been justified with two reasons:1. Existence of spillover benefits to the state of having an

educated citizenry means that higher education will be provided at less than efficient levels if government does not intervene

2. Americans believe in concept of equal access to education

• Although first of these two justifications (spillover effects) is warranted, second one is not– Most students in public colleges and universities come from

high- or middle-income families• If our purpose is to improve access to higher education by low-

income students, state subsidies are a very inefficient way to do it

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Decreasing Government Support forPublic Higher Education

• State support of public higher education decreasing over time

– U.S. public universities and colleges have reacted in the following ways:1. Tuition increases

2. Enrollment caps

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Enrollment Caps• Maximum limit on number of students allowed to

enroll in a school– Accomplished with increased admission standards

• Raising cutoff score on ACT or SAT college entry tests• Increasing minimum high school class rank for entry into

college system

– Advantages:• Eliminating students who might have poor risks for

completion of college, rather than simply excluding students at random

– Disadvantages:• Eliminating “late bloomers” who achieve mature study habits

in college instead of in high school• Eliminating students of low income and/or diverse

backgrounds who have received poor quality K–12 education

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Different Tuition for Different Programs

• Universities are slow to react to changing demands for programs, since demand for particular programs varies over time

– Schools’ adjustments to changes in demand take time

– During adjustment, efficiency decreases and there may be either surpluses or shortages of class sections in particular majors

• Charge higher tuition for very popular, growing majors and lower tuition for declining majors

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Uniform Tuition vs. Different Tuition

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Financial Aid• Comes from:

– Federal government– States– College or university directly

• Comes in many forms:– Scholarships and fellowships– Employer assistance– Veterans’ assistance– College work study– Loans– Pell grants

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Pell Grants• Foundation of financial aid package for students

from low-income families

• Not received by high- and middle-income students

• Has never covered all costs for poor students– Other forms of aid have often been added to help

neediest students meet educational costs

• Most common aid package for those students is a Pell grant and a loan

• Has lost considerable purchasing power in last 30 years

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Financial Aid Data

Family Income Financial Aid

Less than $20,000 $10,350

$20,000–$39,999 $10,551

$80,000–$99,999 $10,093

• Statistics show that financial assistance clearly isn’t targeted to most needy students

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Educational Attainment

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The Economic Left and the Economic Right

• THE ECONOMIC RIGHT (Conservative)– Favor policies to increase

competition in public K–12 system in form of private, charter, and magnet schools

– Favor school voucher systems– Do not favor extensive tuition

subsidies or financial aid for students in higher education unless spillover benefits result

– More likely to favor tax cuts for educational purpose

• THE ECONOMIC LEFT (Liberal)– Emphasize tax reform and

redistribution of tax dollars from rich to poor districts to equalize opportunities

– Fear widespread use of vouchers would endanger public schools by transferring funds away from poor schools that need them most

– More likely to favor expanded financial aid to low-income students

– More likely to favor tax credits for educational purposes

– More likely to support remedies for inequity in education for racial and ethnic minority students

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