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{{DES | des = A wiki page which explains the economics of education [[Market Failure|market failures]] because of externalities and imperfect information. | show=}}
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EDUCATION as a source of market failure



Source of market failure for education: Externalities



Education is deemed as a merit good by the government that has positive externality in consumption: benefits experienced by society but not by consumers/students themselves and not accounted for by the price mechanism

PMB: benefit to individual from additional years of education: employment, higher wages, social mobility etc
SMB: benefit to society/third parties from additional years of education: a more skilled population would attract FDIs which will encourage economic growth
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In a perfectly competitive market, the equilibrium outcome will be at Q* where PMB=PMC. However, due to positive externality, the actual benefit to society is represented by SMB which takes into account full benefit to society of additional years of education. SMB lies above EMB and hence, the efficient output should be at Q’ where SMC=SMB. This leads to underconsumption of Q*-Q’. DWL also occurs without government intervention.




Source of market failure for education: Imperfect Information



Consumers may well underestimate the long term private benefits from investing time and money into extra education



Incomplete Information

Misconception that the education system is more tailored towards creating people who want to be rewarded with capitalistic benefits detached from society rather than thinking individuals that can improve the lives of others around them.



Ignorance of benefits to oneself leading to underconsumption

Ignore the benefits that education brings to oneself, such as skills learned leading to a wider variety of job scope and jobs with higher pay etc.

Cost/Benefit

PMBperceived
PMBactualIf consumers are ignorant of the benefits to oneself of having education, the perceived benefits is lower than the actual benefits and consumption will only be at Q1. The red triangle marks the welfare loss. 


Ignorance of benefits to third parties leading to underconsumption

Unaware of the benefits that education might bring to others such as when requested for help in a certain area of skill or to the productive force.

(Diagram similar to positive externality above)

In a perfectly competitive market, the equilibrium outcome will be at Q* where PMB=PMC since only private benefits and costs are considered as consumers are unaware of the benefits to others. With the ignorance of the benefits to third parties, there is a divergence of RMB between SMB and PMB, with SMB greater than PMB. This leads to underconsumption of Q*-Q’. DWL also occurs without government intervention.




Solutions: Government intervention



Non-Market based solutions: Legislation

Compulsory 6 years basic education to encourage parents to send their children to school
Link to POSITIVE EXTERNALITY: Mandatory consumption of education prevents underconsumption below socially efficient levels, allocating resources efficiently for education as a merit good.


Non-Market based solutions: Regulation

Information about skills upgrading workshops are made available through various pamphlets or brochures given out or advertisements
Link to IMPERFECT INFORMATION: Citizens in the workforce will be will be more aware of the full social benefits of education to themselves as well as to society at large. Hence, there can be a more accurate assessment of PMB and thus moving PMBperceivedto PMBactual. The awareness of factoring in EMB in decision making also moves the equilibrium closer to that of the socially optimum level.


Non-Market based solutions: Educate people about importance of education

With little natural resources in Singapore, human resource that is essentially a skilled workforce is the most important resource Singapore owns. Thus, in Singapore, there is heavy emphasis put upon education where education is seen as the only route to better employment, higher wages, social mobility and better future. As Lee Kuan Yew once said, “Education is the only way up”. Hence, the importance of education has been constantly instilled in minds of students and parents to encourage more students to further their education in Singapore. Thus, the importance of education has been successfully entrenched in minds of Singaporeans where most strive hard in this competitive environment to excel in academics.
Link to IMPERFECT INFORMATION: Students and parents will be more aware of the full social benefits of education to themselves as well as to society at large. Hence, there can be a more accurate assessment of PMB and thus moving PMBperceivedto PMBactual. The awareness of factoring in EMB in decision making also moves the equilibrium closer to that of the socially optimum level.


Market-based solutions: Funding and subsidies

Financial Assistance Schemes
Bursary schemes
Tuition Grant Scheme (TGS) was introduced by the Government to subsidise the high cost of tertiary education
Scholarships for tertiary education
A* science and research scholarships
PSC scholarship
SAF scholarship
Fixed quantity subsidies in NTU/SMU/NUS
Link to POSITIVE EXTERNALITY: subsidies help to lower the costs of the consumers. As SMB is greater than PMB, a subsidy equivalent to the EMB at socially efficient output level, QSE would shift the PMC curve vertically down by that amount PMC'= PMC-subsidy. Therefore, the consumption of education would increase.
Link to IMPERFECT INFORMATION: to encourage allocation of more resources to the provision of education to account for EMB that otherwise would not be taken into consideration by students due to ignorance, the Singapore government can provide subsidies to schools. Hence, this will lower the unit cost of production and provide an incentive for schools to increase the education services provided. As SMB > PMB, a subsidy equivalent to the EMB at QSE would shift the PMC curve vertically down by PMC'=PMC-subsidy. Therefore, the government can increase the number of people having education with the provision of subsidies.



Evaluation of government solutions:



Subsidies at tertiary level

Like all forms of subsidies, a fixed quantity subsidy will cause consumption of university education to increase. If it is indeed true that university education has positive externalities, this is the result that we want.
However, this subsidy method distorts efficiency in two ways: at the consumer level and at the provider level. All subsidies distort consumer preferences. More specifically, this method of subsidy raises the opportunity cost of overseas education since you lose much more in terms of other goods if you either ignore or fail to get the subsidy and choose to pay for your education abroad. The presence of the subsidy means that, to a large extent, most Singaporeans will not consider overseas education. Thus, subsidies create a form of captive market for local universities. As a result, these universities may run into X-inefficiency problems.
Even though there are subsidies at tertiary level, amount of subsidies given are still limited. Hence, tertiary fees are still expensive, deterring students from continuing their studies.
BUT subsidies are still preferred to be used as it permits the markets to operate and ensures that benefits are passed to consumers. It can also be adjusted in response to the magnitude of the problem.


Education

Education is a long drawn process that involves changing mindset. Even though the government might put in effort to promote education, some youths might still not consider furthering their studies and some workers might still refuse to continue upgrading themselves.


General limitations

Lack of information: Government may not know the exact costs of education and the amount to subsidize as there are often many miscellaneous fees other than the school fees (e.g. fees for notes which could be substantial in the long run)
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