Market Failure in Public Education
Market failure is a failure of allocating resources efficiently in a market or allocative inefficiency. There is either an overallocation in which too many resources are allocated to it’s production or a under-allocation where too few resources are allocated.
Lack of public goods is a form of market failure. Public goods are goods that are non-rivalrous, meaning the consumption by one person does not reduce the consumption of others. Public goods are also non-excludable, meaning it is not possible to exclude others from using.
The figure above shows a Consumption Positive Externality graph. On the Marginal Private Benefit curve, at the market price Pm, there’s a quantity demanded and supplied at Qm, we are at allocative efficiency or Pareto optimality where MPC equals to MPB. However if we include the social benefit or the positive externalities, in this case the skills acquired and knowledge learnt from these public schools that can benefit the wider community in many ways, the supply curve should be at the Marginal Social Benefit curve. At the MSB curve, if the market price was still at Pm, we can see that the Marginal social cost does not equal to the Marginal social cost, there is shortage of public education. Instead the Marginal social benefit is greater. The market is not at allocative efficiency, there is a misallocation of resources, in this case there is a underallocation of public education. The price will signal the market to reallocate resources, and we will eventually be at the social optimum price, Popt. At the optimum social price, Popt there will be a quantity of Qopt demanded and supplied. We are again, at allocative efficiency where the Marginal Social Cost = Marginal Social Benefit.
However this situation will not happen to public goods (public education) unless the government intervenes. There will still be a under-provision of public education, not because of the unwillingness of consumption but because firms aren’t willing to produce it and even if firms did, the price of education will still be unaffordable for some families. Private firms would still provide private education because they have an incentive to provide excludable goods where they can charge a price. But since public goods are non-rivalrous and non-excludable, public goods illustrates a free rider problem where people can enjoy goods and services without paying for it. Due to this problem, no profit-maximizing firm would be willing to produce goods that cannot be sold at some price. Because of this, the market fails by not being able to produce goods that are non-excludable, thus leading to resource misallocation as there is a lack of resource allocated to public goods.
Seen in figure 2, there’s a way to correct the market failure in public education. Government can intervene and address the market failure by implicating direct government provision. Through the government provisions, supply increases from the old supply curve S curve to the new supply curve S+Government Provision. As a result we get a new equilibrium where the price, Pc is lower than the market price Pm but at the same time there is a social optimal quantity demanded. As a result there will be more public schools supplied and due to the decrease in price, more people will be able to access these public education.
As seen in the article there are a lot of public schools in the US. These publics school are all funded by the government. Through government provisions, the government can ensure that education is produced at a socially desirable level through the funding of public schools. Public schools are directly provided by the government and are made available free or nearly free of charge. However as seen in the article, there has been a drastic increase in school fees for public schools. This increase contradicts to the idea of ‘public’ school. The purpose of this government provision is to make education non-excludable. However, with the increasing fee, public schools has become excludable. The article mentions that public-school fees are increasing faster than private schools. This shows how inefficient the government is addressing to the market’s failure to provide public education.
In the short run, students won’t be able to afford education if the price increases and if there isn’t enough enrollment, there will be unemployment for teachers and staffs. Also, the government will have to increase their funding for schools in order to provide public education at a socially desirable level. However, with an increase in funding, the government will have to cut down funding for other services or even increase tax.
In the long run, if all schools were excludable, only some people can afford it. Many students won’t be able to afford education, thus it might result in them having a hard time searching for jobs, leading to more unemployments. Some advantages of the rapid increase in public-school fee could be for Private firms, where there might be a higher demand for private schools since the cost of enrolling is basically the same, or even, less.