Someone recently bought our

students are currently browsing our notes.


Education Notes

Economics Notes > The Economics of Public Expenditure Notes

This is an extract of our Education document, which we sell as part of our The Economics of Public Expenditure Notes collection written by the top tier of University Of Birmingham students.

The following is a more accessble plain text extract of the PDF sample above, taken from our The Economics of Public Expenditure Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

Education In the UK education is the 3rd largest area of gov spending (mostly on schools) roughly PS63 billion a year. Has increased 2000-08 by 40% in real terms. The purpose of education is to transmit knowledge, skills, attitudes and values. THE HUMAN CAPITAL MODEL This tries to explain the demand for education in terms of production and utility benefits. A return to education more also have non-money returns like enjoyment and leisure. Assumptions of this model are 1) Education raises the individual's marginal product in the future and therefore their future income. 2) Increase in income is the only benefit from education. Bt is the benefit to from an extra year's education to the individual, r is his personal rate of time preference and the GPV is the gross present value of an additional year of education which is: GPV=

B1 B2 BN
2 N 1+r ( 1+r ) ( 1+r )

The net present value (NPV) is N

[?] Bt N PV =


( 1+ r )t

- C0

The individual will continue to acquire education as long as GPV
> C0 so up to the point where NPV=0. The costs and benefits can also be shown graphically. The additional benefit of HE is 18.5% in terms of wages compared to those who enter the labour market in 2000 in the UK. Benefits aren't just monetary; consumption benefits and utility benefits. So far no need for gov intervention. THE SCREENING HYPOTHESIS By measuring the money income benefits to the individual we can establish a lower bound on the production benefits of education. Suggesting education is related to increases in individual productivity. But the Screening Hypothesis says education is associated with increased productivity but doesn't cause it. 1) Education beyond a basic level does not increase individual productivity. 2) Firms seek high-ability workers but before they employ them it is hard to distinguish those with low ability. Therefore individuals need to make themselves more distinctive by a signal like post-primary education or natural ability. Firms want to design a wage profile such that a high ability worker is paid a high productivity wage, wN, and a low ability worker is paid a low productivity wage, wL. MEASURING THE COSTS AND BENEFITS Measuring the costs e.g. (income foregone) is relatively easy but the issue comes with measuring the benefits of education. The reasons are:

* Output cannot be measured. No definition of a 'good' education. Could use test scores but there are other non-technical measures like consumption benefits (enjoyment from education), investment benefits (higher pay, job satisfaction) and external benefits like shared values (most are immeasurable).

* Connecting inputs and outputs. Education production function is problematic because it is possible to measure the quantity but not quality of certain inputs (teachers' and pupils time, buildings and equipment). Other inputs like natural ability, family inputs.

* Causality cannot be established. Even if everything can be measured it is hard to know whether an individual is naturally able or whether it is due to good education. EXTERNAL BENEFITS

Buy the full version of these notes or essay plans and more in our The Economics of Public Expenditure Notes.