Why is Education Underprovided in Our Society?
With university fast approaching, a nagging voice labelled tuition fees has started to grow in the back of my mind. The pursuit of higher-education often comes at a very high cost to the individual, in the form of student debts that can take quite a long time to pay off after graduation, and this is one of the major reasons why this type of merit good is under consumed and under provided.
A merit good is a good that provides benefits for its consumers and society as a whole, the latter being a positive externality. In the case of education, the positive external benefits to society is the fact that there will be a greater supply of high-quality workers in the economy. As we know from macroeconomics, this translates to growth in a country's long-run potential, represented diagrammatically by the long run aggregate supply curve. However, a characteristic of merit goods is that they tend to be overpriced and under consumed. Here are a few reasons why:
Since education is provided to the individual by the private market, the quantity consumed is at Q and the price is at P. There is under provision of the good between Q to Q1 units.
Education can also create positive externalities in production, where the marginal private cost (MPC) is higher than the marginal social cost (MSC):
Here, the underconsumption is due to the great cost, Pp, that the individual has to pay for a higher-education. The shaded area represents the potential welfare that could be gained if the market was operating at the optimal point for society, PsQs.
Since people have to pay privately through the market for such a merit good, they would only consider their private benefits and costs and would thus consume too little, leading to an inefficient allocation of society's scarce resources.
Consumers may lack perfect information
As an extension to the point above, consumers may not be aware of all the benefits of the good at the time of consumption. This is the case in developing countries like Nigeria, where it is estimated that in 2006, there were 15 million children working long hours instead of going to school, as their income was a major part of their impoverished families' income. The parents may value another source of income to the household more than education, since this allows them to meet their basic consumption needs. Therefore, this leads to education's underconsumption.
Monopoly power may arise
This form of imperfect competition leads to higher prices and lower output. For education, spacial monopolies could arise, where a certain educational institution is protected from competition due to the fact that the geographical area that it is in is not adequately populated to support more than 1 such institution. Since monopolies may wish to maximize profits by producing at where marginal revenue (MR) equals marginal cost (MSC), they will not be producing at the allocative efficiency point with a quantity of Q*. There is dead weight loss created due to this under provision, as indicated by the shaded region:
Due to these reasons, the government may provide subsidies to the point where it is virtually free to the consumer, as in the case of Ontario's publicly funded primary and secondary education system. However, there is still an indirect cost to the consumer in the form of taxes.
Some stats:
http://www.edu.gov.on.ca/eng/educationFacts.html
Between 2015-2016, the Ontario provincial government spent a total of $1.2 billion in capital investment, and another $22.6 billion in educational funds excluding capital.
A merit good is a good that provides benefits for its consumers and society as a whole, the latter being a positive externality. In the case of education, the positive external benefits to society is the fact that there will be a greater supply of high-quality workers in the economy. As we know from macroeconomics, this translates to growth in a country's long-run potential, represented diagrammatically by the long run aggregate supply curve. However, a characteristic of merit goods is that they tend to be overpriced and under consumed. Here are a few reasons why:
- they generate positive externalities;
- consumers may lack perfect information;
- and monopoly power may arise.
They generate positive externalities
Education, specifically, can create both positive externalities in consumption and production. We have already talked about the benefits to society when an individual decides to pursue higher-education, and this is represented below in the marginal social benefit (SMB) curve, which is greater than the marginal private benefit (PMB):
Education can also create positive externalities in production, where the marginal private cost (MPC) is higher than the marginal social cost (MSC):
Since people have to pay privately through the market for such a merit good, they would only consider their private benefits and costs and would thus consume too little, leading to an inefficient allocation of society's scarce resources.
Consumers may lack perfect information
As an extension to the point above, consumers may not be aware of all the benefits of the good at the time of consumption. This is the case in developing countries like Nigeria, where it is estimated that in 2006, there were 15 million children working long hours instead of going to school, as their income was a major part of their impoverished families' income. The parents may value another source of income to the household more than education, since this allows them to meet their basic consumption needs. Therefore, this leads to education's underconsumption.
Monopoly power may arise
This form of imperfect competition leads to higher prices and lower output. For education, spacial monopolies could arise, where a certain educational institution is protected from competition due to the fact that the geographical area that it is in is not adequately populated to support more than 1 such institution. Since monopolies may wish to maximize profits by producing at where marginal revenue (MR) equals marginal cost (MSC), they will not be producing at the allocative efficiency point with a quantity of Q*. There is dead weight loss created due to this under provision, as indicated by the shaded region:
Some stats:
http://www.edu.gov.on.ca/eng/educationFacts.html
Between 2015-2016, the Ontario provincial government spent a total of $1.2 billion in capital investment, and another $22.6 billion in educational funds excluding capital.
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