Externalities and Costs
posted 2007.02.21 Wednesday
This is a part of a larger research project I am working on, but since it is sapping much of my mental time and blogging has been light, I will share some thoughts in this sub-academic forum.
A primary justification in economic theory for state intervention in education markets is the hypothetical presence of positive externalities. One candidate for positive external benefits is crime reduction. A recent empirical paper by Lochner & Moretti shows that a 1% increase in male graduation rates generates $1.4 billion in savings from reduced crimes. This is about $2,100 per graduate, making the social return from crime reduction alone almost one-quarter of the private return (around $8,000). Interestingly, the paper finds that graduating from high school increases the probability of rape and robbery, but the net effect is still positive (preventing murder is the biggest component).
The $1.4 billion figure sounds like a lot. However, we must also consider the cost of education. In the year Lochner & Moretti consider (1990), the total direct monetary expenditures in the United States on public elementary and secondary education was $188 billion (approaching $400 billion today). This figure excludes opportunity costs. Now yes, this is for all grade levels, but presumably the return for high school graduates is a cumulative return for the entire educational experience. Increasing graduation rates from the 1st to the 2nd grade is unlikely to prevent many murders. One explanation of reduced crime rates is that increased productivity raises the opportunity cost of criminal behavior, however Lochner & Moretti explicitly state that they are not testing this causal mechanism (or any mechanism, for that matter).
But the astute observer will say: "Aha! The $1.4 billion in reduced crime benefits is like icing on the cake, since the $188 billion is all a productive investment into education!" And this would be correct, granting the assumption that all of the $188 billion is in fact a productive investment. The signalling theory of education would say otherwise. And even if you don't believe all of education is signalling, this still puts a major dent into the externality story once a full cost accounting is undertaken. A literature review by Andrew Weiss suggests that fully three-quarters of education may be attributable to signalling.
The bottom line is this: if small amounts of externalities are generated by largely unproductive activities, there seems to be little substantive reason to subsidize these activities. Granted, crime is not the only purported externality of education, but we have to take this one piece at a time. Also, it is conceivable for signalling mechanisms to develop in the absence of government subsidies, something it hope to deal with in a post in the very near future.
A primary justification in economic theory for state intervention in education markets is the hypothetical presence of positive externalities. One candidate for positive external benefits is crime reduction. A recent empirical paper by Lochner & Moretti shows that a 1% increase in male graduation rates generates $1.4 billion in savings from reduced crimes. This is about $2,100 per graduate, making the social return from crime reduction alone almost one-quarter of the private return (around $8,000). Interestingly, the paper finds that graduating from high school increases the probability of rape and robbery, but the net effect is still positive (preventing murder is the biggest component).
The $1.4 billion figure sounds like a lot. However, we must also consider the cost of education. In the year Lochner & Moretti consider (1990), the total direct monetary expenditures in the United States on public elementary and secondary education was $188 billion (approaching $400 billion today). This figure excludes opportunity costs. Now yes, this is for all grade levels, but presumably the return for high school graduates is a cumulative return for the entire educational experience. Increasing graduation rates from the 1st to the 2nd grade is unlikely to prevent many murders. One explanation of reduced crime rates is that increased productivity raises the opportunity cost of criminal behavior, however Lochner & Moretti explicitly state that they are not testing this causal mechanism (or any mechanism, for that matter).
But the astute observer will say: "Aha! The $1.4 billion in reduced crime benefits is like icing on the cake, since the $188 billion is all a productive investment into education!" And this would be correct, granting the assumption that all of the $188 billion is in fact a productive investment. The signalling theory of education would say otherwise. And even if you don't believe all of education is signalling, this still puts a major dent into the externality story once a full cost accounting is undertaken. A literature review by Andrew Weiss suggests that fully three-quarters of education may be attributable to signalling.
The bottom line is this: if small amounts of externalities are generated by largely unproductive activities, there seems to be little substantive reason to subsidize these activities. Granted, crime is not the only purported externality of education, but we have to take this one piece at a time. Also, it is conceivable for signalling mechanisms to develop in the absence of government subsidies, something it hope to deal with in a post in the very near future.
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