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Kayiran Dikmen, M. (2007). On the Inadequacy of Public Goods Theory: The Case of Education. PHILICA.COM Article number 98.

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On the Inadequacy of Public Goods Theory: The Case of Education

Meltem Kayiran Dikmenunconfirmed user (Faculty of Political Sciences, Ankara University)

Published in econo.philica.com

Abstract
The main claim of this article is that the public goods theory fails to determine the public or private features of education and further, serves as an ideological instrument for justifying private provision. Because most of the critics assert that the public good theory is being misused to justify government intervention, the article has an opposing view.After briefly explaining the public goods concept, private and social benefits of education and the way that is taken into account is to be assessed critically. Then, education will be analyzed from the perspective of merit good conception, which is distinguished from public goods framework but justifies the public provision. The main conclusion of the article is that neither the public goods theory nor the human capital approach, which are based on the fundamental assumptions of neoclassical tradition, can provide an inclusive explanation for public or private provision.

Article body




 

 

INTRODUCTION

Education is the subject matter of various social science disciplines such as sociology, psychology, political science and economics. However, since it has been associated with the labor productivity, education became one of the most attractive subjects of economics with the capitalist development. While many classical economists such as Adam Smith, Ricardo and Malthus were pretty aware of the link between skilled worker and their productivity, the economics of education, which was considered as a new branch of economics, emerged in the beginning of the 1960s, has extensively penetrated into the mainstream economics. While examining education from the economics' perspective, traditional concepts -like consumption, investment, capital- and analytical tools of economics started to be employed in education. Consequently, notions like inputs or outputs of schools, investment in human capital and rate of return to education have been put into agenda.[1]

Economics of education mainly focuses on the productivity function of education and takes it as an investment in human capital. Human capital is defined as "the stock of skills and productive knowledge embodied in people" in the literature. (Rosen, 1991:682). Accordingly, education is considered the largest investment in human capital. In the simple sense, it seems that the costs incurred by individuals in acquiring more education constitute an investment in their own future earning capacity. Furthermore, because education not only raises lifetime earnings but also enhances future productive capacity of the population, it is also seen as an investment for society as a whole (Blaug, 1976: 1-2). So, if education has both private and social benefits, what can be said about its provision?

In most countries, educational systems are largely owned and operated by the state even though, there are also many private schools financed by households and an increasing tendency of privatization of educational sector all over the world. At the same time, although education is commonly accepted as a public good in popular discussions, from the economics' viewpoint it cannot be easily labeled so. Neoclassical public goods theory consistent with the human capital perspective seems to provide a useful framework for identifying public and private characteristics of education. The theory claims to classify goods with their inherent characteristics and aims to show that no decentralized price mechanism can provide optimal provision of a public good[2]. Hence, one can conclude that if a good can be specified as a public or private good, optimal provision conditions of that good can also be determined. Additionally, it implies that since markets cannot provide public goods, public provision is necessary.

Taking this point of view, the main claim of this article is that the public goods theory fails to determine the public or private features of education and further, serves as an ideological instrument for justifying private provision. Because most of the critics assert that the public good theory is being misused to justify government intervention, the article has an opposing view. The plan of the article is as follows. After briefly explaining the public goods concept, public good characteristics of education will be investigated theoretically. While doing this, private and social benefits of education and the way that is taken into account is to be assessed critically. Next, education will be analyzed from the perspective of merit good conception, which is distinguished from public goods framework but justifies the public provision. Finally, some concluding remarks will be made.

EDUCATION AS A PUBLIC GOOD

Before investigating the public good characteristics of education, it is necessary to define the public good concept. The definition of public good rests on the technical characteristics of the good itself. That is, the public or private character of a good is determined by the intrinsic nature of the good. So, if a good has public good characteristics, government provision of it can be justified. However, since there are different views about the criteria what constitutes a public good[3], it is difficult to present it. Moreover, while some authors underline one characteristic, the others emphasize another one. Even if it is not likely to find a clear definition of public good, using the most common one will not affect the relevance of the analysis.

 

Public Good Concept

The neoclassical theory of public goods is based on three short papers of Paul Samuelson (1954, 1955, and 1959) and contributions of Musgrave (1969), Buchanan (1968) and the others[4]. The distinctive characteristics of public goods are generally explained by two concepts: Non-rivalness in consumption and non-excludability. Non-rivalness means that one person's consumption of the good does not lower the quality or quantity of the good enjoyed by the others. When the goods made available for one user, they become available to many without further cost. National defense is one of the classical examples of non-rival goods. If one benefits from the national defense services that does not prevent anyone else in the country from benefiting them in the same way. In contrast, the consumption of bread rivals with the others' consumption. If one consumes a loaf of bread, then no one else can consume it. Although the original definition provided by Samuelson only covered the characteristic of non-rivalness, economists following him add the non-excludability character to define public goods. Non-excludability means that it is impossible or not feasible to exclude anyone from using non-excludable goods since their benefits are indivisible. In the case of national defense, "everyone -whether they are old or young, hawk or pacifist, tax payer or tax evader- is said to be protected by it". (Malkin and Wildavsky, 1991:358) At the other extreme, there are excludable goods from consumption of which non-payers can be completely excluded. A loaf of bread can again be given as an example of excludable good; only those who pay for it can consume it. Because non-excludability allows people to consume the good without paying for it, it generates the free-rider problem. Implementation of pricing rule is almost impossible in the case of public goods due to the non-excludability, so markets cannot provide these goods sufficiently or at all.

In public goods theory, a good is defined as public if it has both the characteristics of non-rivalness in consumption and non-excludability. In this respect, education is not considered as a pure public good. Since education is partly a rival -as additional person's consumption may cause some additional costs- and excludable good -since the exclusion of non-payers is possible-, it does not fall into the category of pure public goods. However, this does not mean that education is deemed as a pure private good. To investigate the publicness characteristic of education, the mixed (or impure) cases need to be examined.

 

Mixed Goods and Education

Since there is wide dispersion of views about the mixed cases, defining the mixed cases is more difficult than the pure cases. However, we can categorize the existing literature into two main approaches. A group of public goods theorists defines impure public goods as goods that have one of the characteristics in varying degrees[5]. According to this view, non-rival and excludable goods, or rival and non-excludable goods refers to mixed goods. The other view on the mixed goods concentrates on the externalities and spillover effects.

The criterion of having one of the public good characteristics

Non-rival and excludable goods: Up to the capacity constraint, the amount provided a consumer does not reduce the amount available to others and it is possible to exclude anyone from consuming it. Common examples of this category include uncrowded highways and bridges. The marginal cost of usage of an uncrowded highway is zero and since a toll can be levied, exclusion is possible.

It is claimed that, education can represent non-rivalry characteristics in some cases. When a school building is constructed, providing education to a student does not reduce the amount available for other students up to the capacity constraint. However, there is a point where enrolling additional students to the school leads to congestion and, hence imposes a positive cost. Additionally, since the benefits of education can be confined to individuals, education seems excludable.

Rival and non-excludable goods: It is accepted that, over the capacity constraint, non-rival and excludable goods can be the examples of the rival and non-excludable goods. Turning to the highway example again, because an extra driver causes congestion, and levying a toll would worsen the situation, a crowded road becomes a rival and non-excludable good. What is the case with education? If the demand for education exceeds its supply (as it is common in some countries for higher education), education becomes a rival good. Although it is possible to exclude non-payers, some benefits of education are non-excludable, which are mostly taken into account as externalities.

So, what are the implications of the above analysis on mixed goods? Is the highway technically rival or non-rival, excludable or non-excludable? The answer seems to be dependent on whether the road is crowded or not. At this point, defining goods with their intrinsic characteristics has lost its explanatory power. This is also relevant for the case of education. Whether education is rival or non-rival; excludable or non-excludable is ambiguous. Capacity limits make education more of a private good than a public good. What we have left is just non-excludable benefits of education. In that case, it seems it is not possible to find an explicit explanation about the public/private characteristics of education so far. Hence, investigating the social and private benefits of education might be helpful.

 

Private and Social Benefits of Education

Because Musgrave is the first economist who investigated the mixed cases in detail, referring to him might be helpful. As Musgrave (1969: 135) notes, "…most goods which give rise to private benefits also involve externalities in varying degrees and hence combine both social and private good characteristics".

In this context, the most important factor to determine publicness is seemed to be the interdependence of utilities of consumers. This term refers to the spillover effects or positive externalities of consumption or production. To interpret this property for education, one can say that a person derives benefits from his own education, but his education has also some benefits accrue to other persons. In his paper, Musgrave (1969:138) cites the education as an example under the category of "non-substitute externalities" and "mixed benefit goods".

In the case of non-substitute externalities, A derives a benefit from B's consumption, but this benefit has no direct substitute for his own consumption of that good. "For instance, A may invest in his own education to raise his own income, or to be better able to enjoy the literature; and he may have an interest in B's education either for ‘altruistic' reasons, or because this increases his safety or the pleasantness of his social environment." (Musgrave, 1969:138)

In the mixed benefit goods case, Musgrave deals with a good "which generates two types of benefits, one which is purely private and applies the own consumption only; another, which is wholly social and which is enjoyed equally" (Musgrave, 1969:139). In this case, education's external benefit is taken as the benefits accrue to society in general.

To sum up, education is to be interpreted as a mixed good that has both private and social benefits from this perspective. At this point, private and social benefits of education should be evaluated in detail.

Weisbrod (1962:159-171) examines the benefits of education, which are realized directly by the individual in five titles: i) direct financial return, accompanying additional education, ii) the value of the option to obtain still further education, iii) non-financial options which become available to a person having it- job options, income-leisure-security options, additional schooling options, on-the job learning options, iv) hedging option -the increased ability to adjust to changing job opportunities, and iv) non-market returns which are not related to employment conditions[6]. The five items that Weisbrod points out, are generally called direct financial returns[7] or private returns in literature, and taken as the additional financial returns resulted from education. These private returns constitute the private part of education and are generally supposed to be calculated.

The public part of education stems from its externalities. Many authors classify this externalities or social benefits of education differently. For example, Weisbrod (1962:172) and Le Grand and Robinson (1984:64-66), by examining the externalities of education, remark employment benefits and benefits to society in general. Employment benefits include the productivity increases of educated person's fellow workers, prevention of bottlenecks of production process by increasing flexibility and adaptability of workers and so on. In sum, in this category, employment related beneficiaries are "those who benefit by virtue of some employment relationship with the subject" Weisbrod (1962:172). While the external benefits of education accrue to society in general is more extensive; these benefits are not clearly identifiable. Examples of this type are crime reduction, and -as mostly cited- literacy benefits. Le Grand and Robinson (1984:65) explain this category by an example as such:

"Certain aspects of education can only be realized fully if other people share them. Our scope for communication will be severely restricted if we can write but you cannot read! So if communication is in our mutual interests, we benefit from the literacy you acquire through education. On a more general level, we have already spoken of the socialization function of education, and this obviously provides a benefit to society at large."

To summarize the externalities of education that have been cited in the literature[8] we should refer to Blaug (1976: 108):

"a) the income gains of persons others than those that have received additional education, b) the income gains of subsequent generations from a better educated present generation, c) the provision of an efficient mechanism for discovering and cultivating potential talents, d) the means of assuring occupational flexibility of the labour force, e) the creation of an institutional environment that stimulates research in science and technology, f) the encouragement of lawful behavior and the promotion of  voluntary responsibility for welfare activities, both of which reduce the demand of social services financed out of taxes, g) the tendency to foster political stability by developing an informed electorate and competent leadership, h) the emergence of ‘social cohesion' by the transmission of a common cultural heritage and i) the widening of intellectual horizons of both the educated and the uneducated, contributing to enhanced enjoyment of leisure."

Blaug calls the first five items "spill-over effects" and the last four "atmospheric effects". Nevertheless he simply omits the last four items because they are either "old fashioned sociology", "favorite subject of popular magazines", or "over ambitious" but noting else from the economics viewpoint (Blaug, 1976:108). After discussing the first five items, Blaug leaves them out of the analysis because they are unquantifiable. As it is common in neoclassical economics to ignore the subjects can not be represented by monetary terms or prices, this attitude is not just peculiar to Blaug.

The externalities of education are cited in the public goods (or more broadly in economics) literature in general however, due to the difficulty of determination of them economists focus on private benefits. Rate of return analysis, which tries to calculate private and social returns to education, underestimates (or even does not estimate) the social benefits of education because it does not take into account the externalities of education. Therefore, from the neoclassical economics' viewpoint, it can be said that education is a good that has a public part because of externalities; but it does not enough to justify public provision or production. As Stiglitz (1988: 382) notes, "education is not a pure public good, nor do externalities provide a persuasive justification for the role of the government."

 

MERIT GOODS AND EDUCATION

As compared with public goods, merit goods concept raises methodologically much more difficult and controversial issues. In his book, Musgrave (1959: 13) introduced the concept merit wants as "considered so meritorious that their satisfaction is provided for through the public budget, over and above what is provided for through the market and paid for by private buyers". In a later publication, Musgrave (1969:143) explains merit wants more evidently.

".. society in fact wishes to impose a substantial degree of interference with consumer preference; and that therefore a theory of imposed choice is should be incorporated into the fiscal model. Wants with regard to which consumer choice is abandoned and the satisfaction of which is imposed I have referred to as merit wants, and have argued that they remain outside the normative model."

The most distinctive characteristic of merit goods as Musgrave points out is by definition its involvement of interference with consumer preferences. Since consumer preferences is assumed to be reflected the within the political decision-making process, i.e. elections for the provision of public goods, the view of merit goods is completely different from the public goods analysis. However, Musgrave have some difficulties in trying to differentiate merit goods from public and private goods. He asserts that merit goods are the types of social goods in his book (1959:13), but in his article (1969:143), he admits that merit goods can be private goods. While different definitions of Musgrave have been criticized, most of the critics are directed to interference with consumer preference.[9]  Musgrave's defense is based on two main arguments; irrationality of consumers and interdependence of utilities (1969: 143):

"[r]ational individual choice requires acquaintance with alternatives and that experimentation (even though it may involve imposed choice on a temporary basis) may be needed to obtain the necessary information. Temporary use of imposed choice may also be justified as an aid to the learning process (…) Many of the phenomena which appear to be of the merit good type can actually be explained by interdependence of utilities.( … ) This, in fact, is a quite widespread attitude regarding the consumption of basic commodities, e.g. minimum requirements of food, shelter, health and so forth."

Some examples of the merit goods explained within this framework are free medical treatment for the poor, subsidies for low-priced housing, free education and free school lunches. The explanation to the question why education is seen as a merit good is that "the advantages of education are more evident to the informed than the uninformed, thus justifying compulsion in the allocation of resources to education". (Musgrave, 1959:14) In this framework, as parents sometimes make irrational choices, government justifiably restricts the choice of consumers and provides free education through the budget. Additionally some other authors claim that governments may also compel individuals to have education. Therefore, in most counties, elementary education is compulsory.

The concept of merit good raises the question of its legitimacy. For example, who has the right to interfere? How can it be decided which goods are meritorious? Why is elementary education accepted as meritorious? If the answer is given as the irrationality of individuals and interdependence of utilities (externalities), these reasons may also be relevant for some other public or even private goods. Because of these kind of problems and especially the contrasting view of consumer sovereignty, merit goods conceptualization is seen problematic, and is not been used for justification of public provision.

 

CONCLUSION

From the neoclassical economics viewpoint, education is considered as an investment in human capital. The public goods theory that tries to determine public or private characteristics of goods through benefits of which accrue to a person or society coincides with this perspective. Traditional public goods analysis, which relies on two criteria -non-rivalness and non-excludability-, does not provide sufficient tools for explaining public or private aspects of education. In fact, the method of specifying publicness characteristics of goods with the criteria of non-rivalness and non-excludability does not work for any good. From this perspective, no good can satisfy these criteria except national defense[10].  For example over the capacity constraint, all goods become rival - such as education, health, or even the justice and police services- moreover almost all goods and services can be considered as excludable since always a way can be found to recover their cost. Therefore, this view is not useful for identifying publicness of education or any other good.

What prevents education to be a pure private good according to public goods theory is the positive externalities or in other words social benefits of education. However, not only non-economical but also most of the economical externalities of education is not taken into account since they are immeasurable. This brings about bestowing value on an education only to the extent that it increases productivity or provides additional income. Actually, what is called externalities might be more important than direct benefits of education. In this context, human capital or public goods approach seems to confuse means with ends. Therefore it might be promising to turn it upside-down. For a more realistic analysis, all functions of education should be taken into account and this can only be possible with a holistic approach.

Compulsory education or free elementary education is attempted to justify with merit goods argument. However, because of the uncertainty of public or private characteristics of that kind of goods and ambiguity about which goods are meritorious, merit goods argument cannot be used for in defense of public provision. As a matter of fact, free education is mostly grounded on human rights argument rather than merit goods argument.

While there is a wide consensus in the literature concerning the importance of education especially for being the one of the most important sources of growth and human development, the debate about its provision -or finance- is still controversial. Most of the analyses focused on the finance of education are based on the theory of public goods and the rate of return analysis. Since social benefits of education are downward biased, private returns to education is always found higher than social returns to it.[11] Moreover, estimates of the rates of return to education and public good characteristics of it form the basis for policy decisions. Therefore, ambiguity of publicness characteristics of education and the deficiency of social returns to it provides a strong argument for private provision and privatization of educational system.

In the final analysis, it should be noted that neither the public goods theory nor the human capital approach, which are based on the fundamental assumptions of neoclassical tradition, can provide an inclusive explanation for public or private provision due to the following weaknesses. Firstly, ahistorical nature of the analysis averts to explain why education is provided by government in some countries, but not in the others. Secondly, methodological individualism and considering the self-interest as the main motive does not enable us to explain publicness. In this framework, since social welfare is a function of individual utilities and public goods are supplied in accordance with the consumer preferences, there is no need for a "public interest" conception. Especially with the influence of public choice literature[12], public-private distinction has got more and more blurred. Most of the social and political categories such as education and public services have been examined analogously to the market analysis. Therefore, it is not reasonable to expect a solution on behalf of publicness in the world of rational, self-interested and utility-maximizer individuals. Thirdly, the view that is based on the priority of competitive market mechanism constitutes a basis for private provision inherently. The fundamental theorem of welfare economics presumes that competitive markets allocate resources efficiently and for this view, government intervention can only be justified when the market failure emerges. Hence, the engagement to market solutions causes to suppose government "intervention" as the exception while markets are primary. Last but not least, focusing more on the allocative efficiency and ignoring the distributional equity -since it is assumed as subjective and dependent on value judgements- provides a very limited rationale for government provision or financing of education for redistribution.

 

REFERENCES

Blaug, M. (1976). An Introduction to the Economics of Education, Middlesex: Penguin Books.

Bowman, M. J. (1962). The Social Returns to Education, International Social Science Journal, 14 (4): 647-659.

Buchanan, J. (1968). The Demand and Supply of Public Goods, Chicago: Rand McNally.

Colm, G. (1956). Comments on Samuelson's Theory of Public Finance, The Review of Economics and Statistics, 38(4): 408-412.

Eecke, W. V. (1998). The Concept of a ‘Merit Good' The Ethical Dimension in Economic Theory.  Journal of Socio-Economics, 27(1): 133-154.

Eecke, W. V. (2003). Adam Smith and Musgrave's Concept of Merit Good. Journal of Socio-Economics, 31:701-720.

Haq, M. (1995). Reflections on Human Development. New York: Oxford University Press.

Head, J. G. (1974). Public Goods and Public Welfare, Durham: Duke University Press.

LeGrand, J. and Robinson, R. (1984). The Economics of Social Problems The Market versus the State. Second Edition, London: MacMillan Press.

Malkin, J. and Wildavsky, A. (1991). Why the Traditional Distinction between Public and Private Goods Should be Abandoned? Journal of Theoretical Politics, 3 (4): 355-78.

Margolis, J. (1955). A Comment on the Pure Theory of Public Expenditure. The Review of Economics and Statistics, 37(4): 347-349.

McMaster, R. (1997). On the Need for a Heterodox Health Economics. Post-autistic Economics Review, 41: 9-22.

Minasian, J. A. (1964). Television Pricing and the Theory of Public Good, Journal of Law and Economics, 7: 71-80.

Musgrave, R. A. (1959). The Theory of Public Finance, New York: McGraw Hill Book Company.

Musgrave, R. A. (1969). Provision for Public Goods. In Public Economics, ed. Margolis, J and Guitton, H. London: Mac Millan: 124-145.

Orchard, L. and Stretton, H (1997). Critical Survey: Public Choice, Cambridge Journal of Economics, 21: 409-430.

Peacock, A. T and Wiseman, J. (1968). Economic Growth and the Principles of Educational Finance in Developed Countries. In Financing of Education for Economic Growth.  OECD, Paris: 89-101.

Peston, M. (1972). Public Goods and Public Sector, Essex: MacMillan.

Psacharopoulos, G. (1994). Returns to Investment in Education: A Global Update, World Development, 22 (9): 1325-43.

Rosen, S. (1991), Human Capital, The New Palgrave, Dictionary of Economics.

Samuelson, P. (1954). The Pure Theory of Public Expenditure, The Review of Economics and Statistics, 36(4): 387-389

Samuelson, P. (1955). Diagrammatic Exposition of a Theory of Public Expenditure, The Review of Economics and Statistics, 37(4): 350-356.

Samuelson , P. (1959). Aspects of Public Expenditure Theories, The Review of Economics and Statistics, 40:4, p.332-338.

Stiglitz, J. (1988). Economics of the Public Sector. Second Edition. New York: W.W. Norton and Company.

Weisbrod, B. A. (1962). External Effects of Investment in Education. In Economics of Education 1 Selected Readings ed.  Blaug, M. (1968) Middlesex: Penguin Books, 156-182.

Weisbrod, B. A. (1964). External Benefits of Public Education: An Economic Analysis. Princeton: Princeton University Press.



[1] Although this kind of conceptualization of education deserves a comprehensive discussion, this subject will not be dealt with here.

[2] Samuelson (1954:388) explicitly points out that if collective consumption is not zero, there is "impossibility of  decentralized spontaneous solution"

[3] For example, Head (1974) enumerates thirteen characteristics that have been used to define public goods.

[4] For a comprehensive analysis of contributions to the public goods theory, see Head (1974).

[5] See  Peston (1972), Stiglitz (1988) and many other public economics textbooks.

[6] Weisbrod (1962:169) gives an example of non-market returns by referring the person who can prepare his own income tax return, since he is literate.  He asserts that one can compare the cases which this service provided through the market or by the taxpayers themselves. By calculating these benefits he says, "Assume that roughly fifty million of the sixty million personal income-tax returns filed per year are prepared by the taxpayer himself. At a value of  $5.0 per return, a low estimate of an average charge by an accountant for preparing a not-too-complex return, we arrive at an annual market value of the tax-return services performed by taxpayers for themselves of $250 million…. this suggests a current-year return of 3.2 percent of the current investment in literacy!"

[7] "Direct financial returns" term includes not only direct financial returns which Weisbrod cited, but also includes other non-financial and non-market returns.

[8] Some of these studies are, Bowman (1962), Peacock and Wiseman (1968), Weisbrod, (1964)

[9] I will not address the debate here because it is as broad as to be the subject of another article. For some of the discussing issues, see Eecke (1998, 2003).

[10] For a more elaborate discussion of this point, see Colm (1955), Margolis (1956), Minasian (1964) and Malkin and Wildavsky (1991).

[11] For example, in his survey, includes 140 studies from all over the world, Psacharopoulos (1994) concluded that for all levels of education private rate of returns are higher and the rate of returns to primary education is the highest.

[12] For a comprehensive critical survey of public choice literature, see Orchard and Stretton (1997)


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Kayiran Dikmen, M. (2007). On the Inadequacy of Public Goods Theory: The Case of Education. PHILICA.COM Article number 98.


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