Do spillover benefits create a market inefficiency in K-12 public education?

• Author: King, Kerry A.
• Position: Report

In economics there is a well-established framework for determining whether government intervention into a market is justified. If' we look from the perspective of economic efficiency, government intervention has the potential to improve the market outcome when a so-called market failure exists. As Bator (1958) suggests, certain categories of market failures such as public goods, externalities, and monopoly all contain certain properties that lead to an allocation of resources that is not Pareto-efficient--that is, does not equate marginal social benefits and costs.

The use of the word potential is important to note when referring to government intervention and improved market outcomes because modern public choice theory also suggests the presence of government failures. It is conceivable that even in a case where the private market fails to reach an efficient outcome, government intervention might actually worsen, rather than improve, the situation (Sobel 2004). (1) A possible explanation for this occurrence is given by Buchanan (1962), who discusses the concept of political externalities, which refer to situations where political action is carried out without unanimous consent thereby reducing the range of choices open to individuals.

One of the more interesting markets within which to apply these theories is K-12 education. While the production of K-12 education has been and continues to be dominated by the public sector, there still remains an open-ended question regarding the proper role of government in K-12 education. If a market failure exists in K-12 education due to the public goods problem, the government may be able to improve efficiency. But if the K-12 education market is not subject to this type of market failure, there is clearly a justification for less government involvement.

In this article, I present and estimate a model that examines the market failure argument in K-12 education by producing a measure of the degree to which public K-12 education creates Pareto-relevant external benefits to the median voter. Applying an empirical median voter demand curve model, I am able to obtain an estimate (on a scale of 0 to 100 percent) of the degree to which K-12 public education is really a pure private good producing no spillover effects. My results suggest that K-12 education is largely a private good, creating few external benefits to the median voter (above and beyond his or her own private benefit from K-12 education).

Benefits of Education

When an individual becomes more educated, other people besides that individual are made better off: For instance, if we suppose a certain individual goes to medical school and then one day uses her academic research to cure cancer, then this education will have made many people better off. However, these spillover benefits create problems for markets only when a person is not fully compensated for the generation of these spillover benefits. In competitive markets, labor earns the value of its marginal product, and the individual mentioned above will be well compensated for inventing the cure for cancer. Thus, these types of spillover benefits that result from greater individual knowledge contributing to economic progress are fully internalized into one's own individual demand curve for education. The issue discussed in this article is whether K-12 education produces any spillover benefits for which the individual is left uncompensated.

The most compelling argument is that as individuals become educated, others benefit from their ability to interact with one another and share a common language and numbering system, which facilitates trade and human interaction on a broader social scale. It can be argued that these types of benefits cannot be fully internalized by the individual receiving the education. For the remainder of this article I will use the term spillover benefits only when referring to these types of external benefits, excluding the positive benefits that accrue to others for which the individual is fully compensated through market earnings.

It is important for a moment to digress into a discussion of whether these spillover benefits are, at the margin, a ease of a relevant positive externality problem or an irrelevant positive externality problem. Even if K-12 education creates a positive externality, this outcome does not necessarily imply the presence of a market failure. Following Buchanan and Stubblebine (1962), some externalities can be infra-marginal, and thus not Pareto-relevant. (2) This may be the case if the external benefits produced in the first few years of education are followed by additional years of education that fail to produce additional external benefits. As Holcombe (1996) argues, the external benefits accruing from the knowledge of a common language and numbering system are produced almost entirely in the first few years of school.

In addition to the first few years of elementary education, students may also gain certain skills from the first few years of secondary education, which gives them the ability to create external benefits that are not entirely compensated through market earnings. For instance, everyone as a consumer is benefited by the presence of other informed consumers in the marketplace. In addition, benefits are also gained from active and informed citizens participating in the political process.

The Empirical Model

In order to test for the presence of these Pareto-relevant external benefits, I employ a median voter demand curve model. Originally developed by Bowen (1943), and conceptually enriched by Downs (1957) and Black (1958), this model is frequently used to measure the degree of publicness (versus pure privateness) for a good produced by the public sector. For example, Holcombe and Sobel (1995) test the degree to which legislative activity...