Education is a public good because it comprises of several features of public good. But, it is not a perfect public good. It is a public good because it ensures productivity in terms of human capital accumulation, and also ensures economic growth. With the increase in education, productivity and economic growth increases. There is a market inefficiency as there is under supply of education, and demand of society is not met. This can be considered from the fact that with the increase in education productivity, which may pave the way to creation of externality when educated workers fail to get suitable job, and also when they are not compensated effectively for their productivity. Further, more educated people tend to pay more taxes, and they provide other public goods in disappropriate manner. All this process paves the way to creation of market inefficiency. Further, there is a market failure for education is also because consumers ignore the benefits associated with education. There is incomplete information regarding education. There is a misconception that the education system is designed for making people aware of rewards for themselves instead of thinking about bringing improvement in lives of other people.
Consumers do not understand long term benefits of education, and they are not investing their money and time in education. Sometimes market failure arises because people are not willing to pay, and if willingness to pay is known, then free riding is not possible. Market failure in case of public goods arrive because of missing market, as there is non excludability in a way that benefits that are derived from public goods cannot be only confined to those who pay for it. The free rider problem paves the way to under provision of goods, which become a cause of market failure. The inefficiency in education market is also because of the fact that there are students for which social marginal benefits or SMB associated with going to school are greater than Social Marginal Cost or SMC. But, they fail to go to school for several reasons such as lack of money, or decision of parents for not educating their children.
The private market will not internalize this problem because the approach of private market in such case will lead to creation of inefficient outcome. Private market need to know about external as well as private benefits associated with education in order to correct the problem. This can also be explained with the help of fact that the efficiency of market solutions is dependent on decision makers. Such as in this case, students and teachers have good access to information regarding education, and they fail to understand the investment promise that they made for education. However, there is another reason of inefficiency that parents make educational decisions on behalf of their children. In this case, parents internalize the benefits that are meant to be provided to children so that loss of efficiency does not occur (Behrman & Stacey, 1997). In this way, parents are internalizing private benefits that are associated with education.
For maximizing efficiency in the market, there is need of regulations so that market failures and imperfections can be reduced, and externalities can be internalized. Efficiency of market cannot be ensured when there are market imperfections. Private market needs plans regarding education in order to internalize the problem. It is also a fact that the social value of education is greater than private value. Education comprises of positive externalities (Mankiw & Taylor, 2011). The value that is placed on education is, however, valued less as compared to total value of society. This is because of the fact that the social value is greater than the private value. This means that at any price, the benefit given to society is more than the private benefit.
In this regard, government can play its role in order to correct the problem. Government can ensure public financing of private market. It can provide subsidies in order to control cost associated with education. Government should play its role to reduce crowding out effect. Crowding out effect indicates to what extent does public finance replaces private provision. Reduction of crowding out effect can improve efficiency. Government should also understand the social cost and benefits that are linked with public goods. Further, government can help low income groups and families so that they can educate their children, which will help in reducing market inefficiency. This will also help in improving attendance in schools. Government should decide what is best for people. Government should ensure public financing and public provision by opening public schools, where parents have to pay less for their children. Further, government should also play its role, and should intervene in the market in a way that market equilibrium is moved closer to social optimum. However, subsidy is needed for positive externality. Since, education is positive externality, so it produces smaller quantity than is required socially (Mankiw, 2008).
Government should intervene in a way that socially desirable output is produced. Moreover, in order to avoid the problem of free riders government can use tax revenue for producing an efficient quantity of public goods. Free markets, however, usually produce less than optimal, which points out towards the fact that government can itself make market efficient by ensuring production of public goods itself. Further, for removing market inefficiency and for reducing chances of market failure, government should intervene in order to invest in education and training. It should focus on funding education and other public goods for ensuring collective consumption. It can intervene via taxation in order to redistribute wealth and income for ensuring education for the poor and welfare for the poor. It should reduce the prices that are associated with education so that it becomes possible to prevent the loss of efficiency. Furthermore, government should intervene in order to give value judgments regarding educations, so that people stop underestimating the importance of education.
In conclusion, there is market inefficiency for education as there is problem of demand and supply. Educated workers are not satisfied as they are not paid in accordance with their productivity, which is giving rise to market inefficiency. People are ignoring the benefits and advantages of education, they have misconceptions regarding education, which is giving rise to market inefficiency. People are reluctant to attend schools for education because of financial issues and parental decisions. The private market is not effective enough to internalize the problem of education. There is need of government intervention. Government should intervene so that socially desirable output can be produced. Government intervention can also solve the problem of free rider by imposing taxes. It should ensure public finance, and construct public schools so that parents can afford education of their children. It should ensure production of public good (education) itself so that market efficiency can be ensured.
References
Behrman, J.R., & Stacey, N. (1997). The Social Benefits of Education. University of Michigan Press, Michigan
Mankiw, N.G. (2008). Principles of Economics. Nelson Education Limited, Canada
Mankiw, N.G., & Taylor, M. P. (2011). Microeconomics. Nelson Education Limited, Canada
