Free Market In Undergraduate Education Perspective Economic Efficiency Economics Essay

 

從本科教育角度看自由市場的經濟效率

 

”布朗勛爵最近提交了一份報告給英國政府，是關于英國大學教育的融資。報告的建議之一是：本科藝術、人文和社會科學等學科應該存在于自由市場中。從經濟效率的角度評估這些建議。如果你覺得他們是低效的，請解釋你認為這樣一個市場應該如何監管。

 

第一章-總引言

 

引言

 

本研究從經濟效率的角度，分析了自由市場在本科教育在藝術、人文和社會科學的需求。高等教育的自由市場背后的經濟理論是基于自由市場的概念將在高等教育實現經濟效率。布朗勛爵認為,這將確保教育是可持續投資的,教學質量是世界一流的,并且高等教育機構(HEIs)面對所有人開放。[1]

 

然而，本研究將會在現實世界中探討。自由市場不能獲得社會效益是因為以下愿意：缺少最好的競爭；他們不能考慮到高等教育的外部效應。

 

“Lord Browne recently presented a report to the UK government concerning the financing of university education in England. One of the recommendations of the report is that there should be a move towards a free market in undergraduate education in the Arts, Humanities and Social Sciences. Evaluate these proposals from the perspective of economic efficiency. If you believe them to be inefficient explain how you think such a market should be regulated.”

 

CHAPTER 1 – GENERAL INTRODUCTION

 

INTRODUCTION

 

This research analyses the call for a free market in undergraduate education in the Arts, Humanities and Social Sciences from the perspective of economic efficiency. The economic argument behind a free market in higher education is based around the concept that a free market would achieve economic efficiency in higher education. Lord Browne argues that this would ensure that teaching is sustainably financed, that the quality of teaching is world class and that Higher Education Institutes (HEIs) remain accessible to all. [1]

 

However, this research will argue that in the real world, free markets fail to achieve social efficiency because of the following: there is a lack of perfect competition; they fail to take into account the externalities from higher education; and, due to ‘factor immobility’, markets take a long time to adjust to disequilibrium. In this respect, the research claims that Lord Browne’s proposal for a free market will lead to market failure rather than economic efficiency.#p#分頁標題#e#

 

Resulting from the above, this research seeks to answer the following research questions: To what extent will a free market enhance undergraduate education? Does the free market result in economic efficiency? Can a better regulatory option enhance undergraduate education? In addressing these questions, this research will use qualitative methodology which will involve reference to relevant books, journals, internet sources and newspaper articles to substantiate the issues and analyse the proposals for a free market.

 

RESEARCH STRUCTURE

 

The research is structured into four chapters: the next chapter looks at the background to the higher education problem and discusses Lord Browne’s proposals. The third chapter discusses the extent to which the free market will enhance higher education and critically analyses the extent to which the free market reaches economic efficiency. The research will argue that due to the positive externalities of higher education, the resulting under-consumption will lead to market failure. Accordingly, the final chapter will conclude with proposals for a better regulatory option to enhance undergraduate education.

 

CHAPTER 2 – THE PROBLEM AND PROPOSED SOLUTION

 

BACKGROUND TO THE HIGHER EDUCATION PROBLEM

 

Any proposals to improve a leading and internationally respected system of higher education can be difficult to justify to the average person. With education being a non-pure public good, [2] charging fees for its use and thereby seemingly restricting access to it can prove to be controversial amongst the public.

 

As well as creating the “knowledge, skills and values that underpins a civilised society” [3] , there is no doubt that higher education plays an important economic role. For graduates, it is likely to lead to higher wages and a better standard of living. For the economy as a whole, higher education drives innovation and economic transformation: “OECD countries which expanded their higher education sectors more rapidly from 1960s onwards experienced faster growth.” [4] Therefore, reform of the higher education system is as much an economic decision as it is political.

 

In the foreword, Lord Browne mentions that other countries are increasing investment in higher education and educating more people to higher standards. Lord Browne aims to achieve a balance between the level of participation, the quality of teaching and the sustainability of funding; “changing one component has an impact on the others”. [5] This is the yardstick on which to measure the success of the proposals.

 

Lord Browne, in his evaluation of the current system, explains how in 2006 it was envisaged that despite the cap of £3,000 (indexed over time), tuition fees would vary between institutions. However, the £3,000 cap became the minimum level for all institutions. Lord Browne believes that the current system has “established the principle that graduates will pay towards the cost of higher education” [6] and highlights the benefits this increased income has had for higher education, such as improving staff to student ratios.#p#分頁標題#e#

 

BROWNE’S FREE MARKET PROPOSALS FOR HIGHER EDUCATION

 

However, the current system faces major challenges; “[i]nvestment is insufficient to deal with the international challenge.” [7] As Lord Browne rightly points out, institutions have no further access to funding above the maximum fee allowed by the 2006 reforms. Therefore, universities cannot improve quality by persuading students to pay more. [8] Furthermore, there is also the problem of insufficient student places; the current system is unable meet the current demand. The market is therefore not operating at an optimum level. What is Lord Browne’s solution? A free market for higher education.

 

But, what exactly is Lord Browne envisioning? [9]

 

Lord Browne wants students, the direct beneficiaries of higher education, to be the ones to decide whether investment is increased.

 

There will be no single fixed price for higher education. Instead, each institution will have to persuade students that the courses represent value for money. HEIs will look to employment rates, student-staff ratios and other quality measures to try to persuade students that their course represents value for money. If they are not successful in persuading students, prices will need to be altered accordingly. If they are successful, that will be the market price.

 

Therefore, the current cap on fees will be removed and both HEIs and students will enter a free market in which HEIs will have the opportunity to increase funding, subject to student approval

 

The free market proposals do not extend to clinical and priority courses. Some courses are important to the wellbeing of our society and Lord Browne believes it is in the public interest to publically fund such courses to ensure students are not put off by the higher costs attached to such courses.

 

Lord Browne envisages a system in which quality and student choice is maximised. “Our competitor countries are investing more in quality... So we have considered how to sharpen the incentives for quality in our HE system.” [10]

 

Lord Browne envisages the free market will allow successful institutions to expand faster, due to the increased funding available, whilst others will have to raise their game; this will drive up quality.

 

As mentioned earlier, Lord Browne aims to balance the level of participation with other goals. Therefore, he proposes an increase in the amount of student loans and grants in an effort to allow all students the opportunity to benefit from the increase in university places.

 

To further fulfil this aim, there will be no upfront payments by students as this has a negative effect on participation. Student choice will not be effective if students have to meet short term financial obligations#p#分頁標題#e#

 

Furthermore, when students do start to pay back their fees, payments must be affordable. Lord Browne’s system of paying back fees will be more progressive than the current system.

 

Graduate with high incomes will now pay an additional 2.2% interest above the inflation rate [11] . This would ensure that the government will not be paying for those graduates who receive high salaries. Low earning graduates will not this pay interest.

 

Graduates who have acquired a private benefit will pay in line with the benefits they derived from higher education.

 

Finally, Lord Browne encourages support for part time students.

 

Currently, unlike full-time students, part-time students must pay their fees upfront. These will be eliminated, thereby increasing access to higher education.

 

Increasing part-time study is an effective strategy to develop our economy. As part-time students usually undertake activities in different parts of the economy than full-time students, the scope of benefits derived from higher education would be maximised.

 

CHAPTER 3 – THE ECONOMICS

 

TO WHAT EXTENT WILL A FREE MARKET ENHANCE UNDERGRADUATE EDUCATION?

 

In a free market for higher education, the theory holds that the price is decided solely by the mutual consent of the buyer (student) and seller (HEI). Therefore, price is the result of the decisions of buyers and sellers en masse.

 

Markets can either be regulated (‘controlled’) or free. A ‘free’ market is one where there is no economic or regulatory intervention by the state. ‘Economic’ intervention is action taken by the government in an effort to influence the market economy. In a regulated market, the state directly regulates the market rather than relying on free market principles.

 

In its purest form the state would have no role in a free market; it would neither limit nor promote economic activity. In the developed world, a pure free market does not exist; governments like to get involved and encourage people to take up higher education because it is seen as an advantage to the economy.

 

The aim of the free market proposals is to achieve economic efficiency. If the market reaches economic efficiency, undergraduate education can be enhanced as it will help achieve the aims set out by Lord Browne; improving the sustainability of funding, the level of participation and the quality of teaching. How exactly an economically efficient market will achieve these aims will be made clear in our analysis of economic efficiency below.

 

ECONOMIC EFFICIENCY

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This section will analyse the concept of economic efficiency and critically discuss whether Lord Browne’s proposals achieve economic efficiency.

 

WHAT IS ECONOMIC EFFICIENCY?

 

Economic efficiency refers to the rate of increase in social utility (consumer satisfaction) in relation to the quantity of the community’s resources that it requires. Microeconomically, economic efficiency deals with the allocation of scarce resources. Each university place must be produced at minimum cost and individual HEIs must get the maximum benefit from their resources.

 

In reality the market fails to achieve social efficiency for the following reasons: there is a lack of perfect competition; the market fails to take into account the positive externalities associated with higher education; and, due to factor immobility, the market takes too long to adjust to disequilibrium.

 

There are a number of criteria for measuring efficiency. Pareto efficiency, or Pareto optimality, is achieved when a change to a different allocation of goods or services amongst a group of individuals cannot make at least one individual better off without making another worse off. This is a minimal notion of efficiency and does not necessarily result in a socially desirable distribution of resources. In practice, most actions do make someone worse off. In higher education, the opportunity cost of increasing one student place is the next best thing the resources could be used on. Therefore, for example, with less government funding in health care, some people may be made worse off by the government deciding to admit an extra student into higher education.

 

As the Pareto criterion is too restrictive to be generally useful, the Kaldor-Hicks criterion should replace the Pareto criterion as the measure of efficiency; it is the standard measure of normative efficiency in economics. [12] The increase in one place at an HEI will only be Kaldor-Hicks efficient if it can benefit students and the society as a whole even after they have compensated those who lose out from it, also known as the ‘compensation principle’.

 

PERFECT COMPETITION

 

In economic theory, perfect competition exists where no individual HEI is large enough to be able to set prices of higher education. In a perfectly competitive higher education market there must be ‘perfect information’; students must have knowledge of all required information to make a transaction choice.

 

In analysing the extent of perfect competition, we will begin by a brief introduction to the theory of supply and demand. ‘Demand’ refers to the market pressure from people trying to go into higher education. Students will bid money for higher education, whilst HEIs will offer students higher education for money, i.e. the ‘supply’. When the offer matches the bid, we reach a price which both the buyer and seller are happy with and a transaction can take place.#p#分頁標題#e#

 

It is this tactical behaviour by the two principal actors (HEIs and students) that will decide whether there will be economic efficiency in the market. The HEI has the economic problem of reducing costs by being efficient and maximising profits. Russell Group universities are in high demand and as a result, they are in a strong position to be able to demand higher fees. This hinders the chances of having a perfectly competitive market.

 

Cowell sees the consumer as the “heart of microeconomics”. [13] He highlights three ingredients to the basic consumer optimisation problem: the commodity space; the market; and motivation. [14] In his discussion on what makes a good microeconomic model, Cowell highlights “motivation” and an “economic environment” as key players in an effective economic model. [15] By motivation, he is referring to “self-interest”. It would appear that both HEIs and students have this required ‘motivation’; HEIs having the self-interest to develop into a more successful HEI and students having the motivation to receive the best education for the cheapest fee possible.

 

However, under the current system neither the HEI nor the student can act upon these motivations. HEIs do not have the platform to increase funding to develop further and students do not have the optimum level of choice. The result is that students make decisions based on factors which are not economically motivated. This is where the “economic environment” referred to by Cowell plays a huge role.

 

The consumer must have access to a market in which there is perfect information, perfect factor mobility, zero barriers to entry and profit maximisation (all characteristics of a perfectly competitive market). Lord Browne aims to achieve ‘perfect information’ in the market through a central system where UCAS makes available financial information such as the cost of the course, cost of university halls of residence and the maximum bursary available to each student, at the time they are applying. [16] Furthermore, he promotes the entrance of new HEIs into the market and encourages productive efficiency. In this respect, and although the market will not be perfectly competitive and economically efficient, there is a general trend towards a more perfectly competitive and efficient market.

 

EXTERNALITIES

 

As discussed by Blaug, the market failure applicable to higher education is “externalities in production and/or consumption” [17] This actual market supply should take into account marginal social costs, and market demand should represent the marginal social benefits gained when supply is increased by one student. If there is a benefit to students and the society as a whole once the market has taken into account the externalities, it will result in a Kaldor-Hicks efficient market. In many markets, the equilibrium price does not take into account the marginal social benefits and costs and therefore the government must intervene to ensure that the market price reflects this.#p#分頁標題#e#

 

MARGINAL SOCIAL COSTS OF HIGHER EDUCATION

 

The total cost of providing space for one extra student must include the costs to the external environment and other stakeholders, as well as the direct private costs. This can be illustrated by the following economic equation:

 

Marginal Social Cost (MSC) = Marginal Private Cost (MPC) + Marginal External Cost (MEC)

 

At first it may appear that no significant marginal external costs to society exist in increasing higher education places. However, Kling argues: “If the higher income that you get from education is due to its signaling effects, then that is a classic negative externality.” [18] This is the idea that employers see a university degree as useful because of the fact that it ‘signals’ that an individual has a set of desirable characteristics, as opposed to it ‘certifying’ what the individual learned at university. In these cases, “the value of the degree comes primarily from signalling” [19]

 

Due to the current difficulty in securing graduate jobs, graduates are being forced to enter lower-paid jobs which have previously been carried out by those without higher education. If places for higher education were to increase from 45% [20] by the recommended 10% [21] , this could lead to a larger graduate surplus. Therefore, if higher education increases, those without a higher education would be left in a worse economic position. This could result in a possible negative externality for society.

 

Klaug explains in his article that real externalities must be distinguished from pecuniary externalities and marginal externalities from total externalities. [22] It is must be shown that the social consequences resulting from higher education have economic value and that these consequences are functionally related to the size of the HE system.

 

Having clarified the nature of the negative externalities we must try to quantify them, if only to measure that the positive externalities outweigh the negative. External costs can be difficult to quantify due to their far-reaching effects. Despite the effort of economists such as Krueger and Lindahl [23] in measuring externalities in education, no mutual consent has yet been achieved. Therefore it is difficult to calculate exactly how much to subsidise higher education in order to reduce externalities to zero.

 

MARGINAL SOCIAL BENEFITS TO HIGHER EDUCATION

 

Whilst the supply of higher education must take into account marginal social costs, the demand must consider the marginal social benefits:

 

Marginal Social Benefits (MSB) = Marginal Private Benefits (MPB) + Marginal External Benefits (MSB)

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The external benefits form part of the overall industry demand for higher education. Lord Browne in his report contends that graduates are “less likely to be involved in crime, more likely to be actively engaged with their children’s education and more likely to be active in their communities.” [24] There is no doubt that this can be counted as a benefit to society. However, Kling’s main concern is with the content of what is taught to students. If it is taught in universities that “profits are evil, man-made global warming is beyond doubt, and it is wrong to question that gender differences are socially constructed” then in his perspective education is not making the students ‘better’ citizens. [25]

 

Nevertheless, there is the common argument that if my neighbour’s son was to become a surgeon and some years down the line performs life-saving surgery on me, we can immediately see a direct social benefit. At this point it is worth remembering that Lord Browne is not actually recommending that the free market extends to clinical and priority courses. What is the reason for this exclusion? These courses are “important to the well being of our society and to our economy” and “there is a risk that they [students] would choose to study cheaper courses instead.” [26] Essentially, it is believed that the positive externalities of such courses are too significant to allow the market to remain unregulated.

 

However, although it may be argued that the positive externalities affecting the ‘Arts, Humanities and Social Sciences’ are not as significant as those of priority courses, they also have social benefits. Based on Lord Browne’s own reasoning, there should surely be some kind of regulation to promote ‘Arts, Humanities and Social Sciences’.

 

However, the indirect benefits of education are so great that its direct benefits are not necessarily the most important aspect. Some of the indirect benefits that have been cited in literature are worth mentioning here: Firstly, the spillover income gains to persons who have not received the education, and to subsequent generations, is too vast to be able to quantify. Secondly, the higher education system provides a convenient mechanism of cultivating potential talents in the Arts and Humanities sector and providing an environment for research. Thirdly, as established earlier, higher education encourages lawful behaviour and also promotes voluntary responsibility for welfare activities. Finally, there is an indirect benefit from the political stability achieved by developing an informed electorate and competent political leadership. [27] It is safe to say based on the above analysis that, on balance, there are substantial positive externalities of higher education, even in ‘Arts, Humanities and Social Sciences’.

 

CONSUMER SURPLUS#p#分頁標題#e#

 

‘Consumer surplus’ measures the benefits consumers derive from their consumption of goods and services. It is essentially the difference between what students are willing to pay for higher education and what they actually pay. The elasticity of demand will have an impact upon the amount of consumer surplus present in a market.

 

One of the estimates for elasticities of demand of higher education in the United States is a price elasticity of -1.058 for public institutions and -0.6414 for private institutions, and income elasticities of 0.977 and 1.701 respectively. [28] From the above figures we can see that, for public institutions, the price elasticity of demand is elastic (shown by the diagram on the left) whereas it is inelastic for private institutions. Therefore, with elastic demand, a small change in price from P1 to P2 will have a large affect on the amount of university places demanded.

 

UNDER-CONSUMPTION

 

Where this is the case higher education may be under-consumed and students will not take into account the positive externalities. The economically efficient market can be illustrated by the diagram below:

 

MPB (D0)

 

MSB (D1)

 

Supply

 

Welfare loss where MSB>MPB, above output Qp

 

Due to the high costs to enter higher education, students would demand Qp instead of the socially desirable output of Qs. ‘Welfare loss’ referred to in the diagram refers to external benefit which is not being taken into account by having a free market. Demand must be increased to D1 to ensure there is no welfare loss.

 

However, as we can see from the mass public protests, students see the fees as being too high and as a result would look only to the private benefits of entering higher education rather than the social benefits. Furthermore, low income families have a different reaction to debt than middle income families. Lord Browne has thought about low income families [29] and based on Lord Browne’s estimates, the 20% of lowest earners will pay less than today [30] . Nevertheless, lower-income families may not understand the difference in nature of student loans to commercial loans. Entering early employment may seem like n reasonable alternative to higher education; furthers the chance of higher education being under-consumed by students.

 

As mentioned earlier, the market failure applicable to higher education is “externalities in production and/or consumption” [31] . If students are not taking into account these externalities, the market will not be operating at an economically efficient equilibrium and therefore “market failure” will exist. To correct market failure, there must be government intervention of some sort.#p#分頁標題#e#

 

CHAPTER 4 – SOLUTION AND CONCLUSIONS

 

There is a debate on how to maximize efficiency. Some advocate laissez faire, to remove government distortions in the market, while others advocate regulation, to reduce market failures and imperfections. Vince Cable, the Secretary of State for Business, has said he is open to suggestions from inside and outside the house. This section will give recommendations as to what must be contained in the higher education bill as regards to correcting the market failure.

 

AIMS OF REGULATING A MARKET

 

Legal draftsmen must remember that regulation must not invade the role of market forces. There is clear evidence from the European single market program that removing regulatory barriers in a market system has positive economic affects. As Feketekuty notes in his article, there are a number of principles which can guide governments in developing sounds laws. [32] Feketekuty believes that these principles can help “assure that the laws and regulations are well targeted at desired social objectives and that they do not burden economic activity more than is necessary to achieve those objectives”. [33]

 

Firstly, laws must be transparent. All economic actors, including HEIs and students, must know the laws. This is a requirement for fairness, economic efficiency and to ensure market outcomes are not distorted. Also, the provisions must be “based on objective, measurable, and performance-based criteria.” [34] Although it is difficult to achieve this goal fully, it helps assure that enforcement of the regulation is not based on arbitrary criteria. Finally, the government should only regulate activities directly related to the achievement of market efficiency.

 

HOW TO REGULATE THE MARKET

 

The recommendations given by Lord Browne in his report go some way in minimising the extent of the market failure. He tries preventing the under-consumption of higher education by increasing the amount of grants and student loans. By increasing transparency, more people will be aware of the bursaries and other support available to them. However, will this do enough to increase the incentives to consume higher education at the new higher price?

 

As mentioned earlier, most students see the increase in fees as too burdensome and have overlooked these small incentives. Although subsidies may reduce the incentives to improve productive efficiency, there are arguments in favour of subsidies based on equity and fairness, as well as other social objectives. Governments have to look at more than just the economic aims of regulation when regulating the market.

 

What if the government increases the subsidies to students rather than the subsidies to universities? For example, in the 1960s French students were given huge incentives to enter higher education such as cheap housing and meals. [35] It seems sensible to increase indirect incentives to students rather than providing sizeable payments to universities. This way, universities will still have incentives to provide the best education with the option of increasing fees, whilst students will have bigger incentives to enter higher education and consume closer to the socially desired optimality and prevent market failure.#p#分頁標題#e#

 

As a recommendation, there must be a minimal subsidy of £1,500 given to universities and a cap on fees at £8,500. The £1,500 subsidy would be enough to keep the fees that bit lower for students, yet small enough not to be a disincentive to universities to increase internal efficiency and accountability to students. The £8,500 cap would minimise the risk, discussed in section 3.2.2, of HEIs being able to set high fees. Although this could potentially result in students paying some £5,000 per year more than today, this would be less likely than under Lord Browne’s system.

 

It is estimated by Lord Browne that to maintain the current rate of investment, universities would require £7,000 per year. Therefore, by requiring HEIs to provide a thorough account of their expenditure where fees reach the £5,500 margin, and requiring 35% of all fees above £7,000 to be made available to the government, we can ensure that universities are forced to improve their productive efficiency.

 

Under this fee structure, there would be scope to increase funding by £2,475 per student than under the current system. Under the above, it is estimated that the average price for a degree in ‘Arts, Humanities and Social Sciences’ would be approximately £5,500 (based on current fees).

 

CONCLUSION

 

Looking back at the yardstick, the free market proposal does not provide the best solution to the problem. Although it allows for increased investment and the possibility of improvement to the quality of teaching, it does so at the expense of participation rates in higher education. Lord Browne’s presumptions that students, despite already having shown that they are willing to pay for education, will be prepared to pay substantially higher fees have been challenged by the mass student demonstrations.

 

Therefore, due to the under-consumption by students, the positive externalities of higher education will not be taken into account. If there is an under-consumption of higher education the market is not operating efficiently at the market equilibrium. The government needs to regulate the market to reverse these problems.

 

The system proposed in this paper ensures the market is as closest to economic efficiency as possible. It is also the best system in which to achieve a balance between the level of participation, the quality of teaching and the sustainability of funding.