When I was a student in university, I felt quite strongly about this issue. I believed firmly that education should be free. After all, education is necessary for a nation to succeed. An educated populace, I believed, should be seen as a form of infrastructure – as necessary for a strong economy as good transport or telecommunications systems. Therefore, the government should pay for everyone to get educated for free, I thought.
I certainly benefited from free education. The government of my country didn’t start asking students to pay for higher education until I started my postgraduate course – and then I received a sequence of scholarships and strange letters (“You have been studying too long, so you don’t have to pay”) which meant my postgraduate education was free of charge. Then I went to work.
I travelled to an Asian country to take a job as a mathematics lecturer in a private college. An important question, every month for the next 10 years, was “how can we get more students, so that their fees can pay the bills, or maybe even make a profit?” I was exposed to the other side of the education equation – it costs money to provide it. The student benefits immensely from becoming educated. Why should the student not pay?
In fact, both arguments are true.
If someone argues that education should be free, it is fair to counter that “the student benefits so much from being educated. Why should the taxpayer subsidise this while the student pays nothing?”
If someone argues that students should pay for their education, it is fair to counter that “the economy as a whole benefits from the existence of educated people. This is exactly the kind of thing taxpayers should subsidise!”
So I wondered about this. Should students pay? Or should the government? The answer came from a very unexpected source.
I started reading some books on economics, in particular, Tim Harford‘s “Undercover Economist“. Chapter 4 (I think) explained a concept I’d never heard of before – externalities.
An externality happens whenever somebody does something that inadvertently affects someone else. An example that’s in the news all the time lately is climate change and global warming. The problem is that if I drive my car or use my air-conditioner, I cause some carbon dioxide pollution. The extra bit of pollution I add might cause some expense for someone else somewhere else in the world, by making a storm somewhere sometime just that extra bit stronger. There’s no way for that guy to negotiate with me about his blown-in window – he doesn’t know who I am, or that my bit of pollution was the straw that broke the camel’s back. Anyway, the storm may not appear until 2040.
There are two issues here.
- Would society be better off, as a whole, if I made the car trip, or not? Sure, it causes a bit of pollution, which causes a bit of damage to someone. It also benefits me, otherwise (presumably) I wouldn’t take the trip. Does the benefit outweigh the damage?
- How can I be persuaded to think about this whenever I’m wondering whether to hop in the car?
Scientists can come up with a reasonable guess about how the weather will change. Using this information, people can figure out what the costs will be, and therefore, roughly how much damage each ton of Carbon pollution causes. The answer is that it causes about $40 worth of damage, but depending on various assumptions, the answer can vary quite a lot. This gives a partial answer to the first question. We can compute how much damage the car trip causes other people. However, no amount of calculation can tell how much the trip is worth to me. Some trips are worth almost nothing, and I’d happily give them up. On the other hand, a trip to the emergency department of the hospital might be worth millions to me.
The answer economists have come up with for externalities is to impose the cost of the pollution on the polluter.
If, somehow, whenever I made a car trip, I had to pay for the damage it would cause, then I would only make those trips where the benefit outweighs the damage. I might choose to walk the half mile to the store instead of driving. I would still drive to an urgent hospital visit.
Hence, many cities around the world impose a “congestion charge”. If you want to drive through the city centre, you pay. If it’s still worth it, great. If not, then you haven’t clogged up the roads at least. Britain imposed a Sulphur pollution charge on polluters, and suddenly the problem of acid rain was solved. Economists recommend to governments that they impose either Carbon pollution taxes or a permit trading scheme. This means that eventually, when everyone’s had time to adapt to the scheme, pollution only happens if it’s worth it.
However, this post is not about Climate Change, it’s about who pays for education. And the answer is that getting educated produces externalities.
Sure, I benefit greatly if I choose to get educated. However, I also, quite by accident, benefit a whole lot of other people, but becoming a cog in the infrastructure of a knowledge-based economy. The question, then, is not “who should pay for education”, but “how much does society benefit when people get educated?”
Yes, externalities are not all bad. The solution to positive externalities is the same as for negative ones – ensure that those who cause the externality receive a benefit equal to that they inadvertently produce. For education, this would mean that a student would contribute towards the cost of educating them, but be subsidised according to the future benefit society will receive.
The subsidy will mean that some people for whom education is not worth the cost will choose education anyway, since it is worth the net cost after the subsidy.
Thinking like this, we don’t have to worry about philosophy. We don’t have to argue “education is a right” and try to ignore the fact that it costs someone money. We don’t have to argue “user pays” and try to ignore the social benefit education brings. We just add up the benefits, and subsidize education to that level.
This may mean that education ends up being free. It may mean that education is still costly. It may even mean that people get paid to study. Whatever the answer, at least we would know the money spent educating people is money not just well spent, but so well spent that it couldn’t be better spent anywhere else.
Isn’t it true that when subsidizing particular goods or services, you undermine the competitors? And isn’t the direct competitor of the adult education sector actually the labour market?
So by encouraging a whole section of society to leave the labour market and enter the education market, you are undoubtedly hurting the labour market to the same extent as you are enriching the education market.
It seems that the benefits in terms of positive externalities would probably be counteracted by the negative overall effect to the labour market. Plus, someone has to pay for these subsidies, and that would mean either a tax increase, or more government debt – both of which would be extremely harmful to the economy in terms of lower disposable income or rising inflation.
No one would dispute that education has great benefits to society, but then again no one would dispute that a healthy diet has great benefits to society as well.
There are innumerable things the government could subsidize to make society better. But is that really the function of government?
More importantly, shouldn’t the government subsidize broccoli?
Good to learn externality, and good to learn the argue from this angle, and it is great still can learn from you after left SIT, Dr Mike! Thank you.
It may be more accurate to say that subsidizing education pushes people out of the unskilled labor market into the skilled labor market. This will make clean toilets more expensive, and vaccines cheaper. Which of those is better for public health is an interesting question, and I don’t claim to know the answer. In general, though, if society is better off when people pursue education, and if not all the benefit falls on the educated, then education should be subsidized to the extent needed to make up the difference – no more, no less. This calculation would have to take into account the fact that education tends to keep people out of productive employment for a number of years. This “cost” may well be worth it. We certainly think it is worth it in the case of, say, children.
You raise a partially valid point about the impact of tax increases/government debt. I’m not sure how that would be worked out in an ideal world, but in the real world there’s an easy solution – find some untaxed negative externality, and tax that. This hits two birds with one zero-cost stone. There’s plenty to choose from. Even if that proves politically impossible, the negative effect is partially offset by the fact that the subsidy goes back into the economy as the student orders slightly more upmarket pizza than they otherwise would.
Should the government subsidize broccoli? The answer depends on whether the benefit of a healthy lifestyle falls mainly on those that live it, or whether there are externalities at play when you choose potato over chips. In Australia, the government heavily subsidizes healthcare, so the answer is “yes”, even if only because if I stay healthy, everyone else pays less tax. However, the Australian government also exempts broccoli from the broad-based 10% GST (a kind of consumption tax), so they do, in fact, subsidize broccoli too.
thanks!
You make some good arguments for enforced market controls.
I would like to point out that a subsidy is when the government gives money to stimulate a business.
In order for the government to be subsidizing broccoli, they would need to take it a step further than removing the tax on it.