Discuss the view that governments should always intervene in the market for education.

Introduction

  • The merit nature of education implies that education is usually under consumed in society and hence warrants government intervention to address the market failure.
  • However, education can be further classified into primary, secondary, tertiary and the extent of under-consumption can differ across these different levels of education.
  • This paper seeks to examine whether governments should always intervene in the market for education and argues that the extent of government intervention ought to differ depending on the levels of education.

Body

[Thesis]: Government should intervene because there can be market failure in education

  • As education is a merit good that generates positive externalities; external spill-over benefits to third parties, there is a divergence between the marginal private benefits (MPB) and marginal social benefits (MSB) of education. The external positive externalities, as mentioned earlier in (a), leads to the MSB curve to lie above the MPB curve by an amount equal to the marginal external benefit (MEB) as seen in the below diagram.
  • Fig. 1 above shows that without government intervention, only Qp (where MPC = MPB) amount of education would be consumed by students. This is less than the socially optimal amount of Qs(where MSC = MSB). There is under-consumption of education as compared to Qs.
  • This under-consumption of education is a form of allocative inefficiency as MSB ≠ MSC. There is welfare loss (deadweight loss) to society equal to the shaded area. Society would benefit from an increase in the consumption of education in the form of more students receiving more education, or students increasing their levels of education. Governments should hence intervene in the market for education.
  • Briefly state how governments can intervene – subsidy = MEB at QS, direct provision, legislation etc.
  • [Students can include other reasons for government intervention such as income inequality or education as a social leveller as education exhibits multiple sources of market failure.]
  • [Anti-thesis]: Government should not intervene because:
  • Tertiary education generates negligible externalities
  • In contrast, it can be argued that the marginal benefits of tertiary education are accrued almost entirely to private individuals themselves. Individuals receiving higher education levels are more likely to receive higher income levels. Since the MEB can arguably be considered negligible for tertiary education, governments may not need to intervene.
  • Possible government failure
  • Government intervention may lead to possible government failure, resulting in greater deadweight loss to society. Due to imperfect information, governments may not always estimate the amount of MEB accurately and give the required amount of subsidies to encourage consumption to the socially optimal level of Qs.
  • Conversely, if more subsidies than is ideal is given, this can lead to the creation of undesirable incentives, and result in the over consumption of education. An example of which could be China, where the supply of highly educated workforce outstrips demand, resulting in high levels of graduate unemployment. 
  • Over-subsidising education also implies that resources are allocated inefficiently. As resources are limited, allocating resources towards the funding of education would mean a diversion of resources away from other sectors such as healthcare and transportation which could be in more dire need of such funds.
  • In the case where government intervention arguably leads to greater inefficiency, perhaps it would be better for such governments to not intervene in the market for education.
  • Evaluative Conclusion
  • In summary, education is a merit good confers positive externalities to society. However, the question presupposes that education is a homogenous good when it is not so. The extent of positive externalities differs across different levels of education.
  • Whether governments need always intervene in the market of education would hence depend on the education levels and extent of benefits conferred on society. As discussed earlier, primary basic education generate significant positive externalities which can arguably justify more government intervention as compared to secondary or tertiary education. In the case where the external benefits are extremely large, the government can directly provide education so the socially optimal level Qs, is consumed. For Singapore, the government intervenes more heavily in primary and secondary education by the direct provision of education, and heavily subsidises education.
  • This paper has also shown that there are unintended consequences of government intervention, with one example being the possibility of government failure which may result in greater deadweight loss to the society. Governments would thus have to be judicious in their intervention given that there would always be opportunity costs involved.