GCE A'Level CSQ 2023 Question 1 - Suggested Answers
Costs & benefits of education
(a) With reference to Figure 1, compare the potential benefits for a graduate in the US with a Bachelor's degree to a school leaver who has a High School Diploma. [2]
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Bachelor’s degree holders earn a higher wage rate than high school diploma holders. During an economic downturn such as the COVID-19 pandemic, unemployment rates were much lower for Bachelor's degree holders compared to High School Diploma holders.
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(b) With reference to Extract 1 and using a supply and demand diagram, explain one possible reason for the higher average earnings of graduates with a Professional degree compared to those with a Bachelor's degree. [3]
Individuals who possess a professional degree such as a doctor may require “additional training” and the time taken to successfully nurture them is lengthier than Bachelor's degree holders. This would cause the supply of professional degree holders (SSinelastic) to be more price inelastic than Bachelor’s degree holders (SSelastic). Despite the COVID-19 pandemic, let's assume that there is an increase in demand for workers with both educational attainments. This causes the demand curve to shift rightwards from DD0 to DD1. At the initial wage rate W0, there is a shortage of workers at Q0 to Qdd'. This shortage exerts an upward pressure on wages causing it to rise. When the supply of price is inelastic, a proportionate increase in wages will lead to a less than proportionate increase in quantity supplied, thus wages will have to rise by a larger extent from W0 to W2 to eliminate the shortage, compared to Bachelor’s degree holders from W0 to W1. This explains the wage differential between two different educational attainment depicted in Figure 1.
(c) 'Opportunity costs may make even free schooling unaffordable for some families.' (Extract 4)
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Explain one example of an opportunity cost that might make free schooling unaffordable. [3]
Opportunity cost is the net value of the next best alternative forgone when a decision is made. When low-income families decide to send their children to enjoy free education, the income that they could have earned to “supplement the household income” is being forgone. This forgone income is larger than the net benefits to send their children to free schooling, thus making it "unaffordable".
(d) Explain how asymmetric information may lead to wrong choices in the market for education. [4]
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Asymmetric information occurs when one party (the seller or the buyer) possesses more information than the other party and uses that additional information to gain the upper hand in that transaction.
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In the education market, adverse selection may exist. Parents do not possess sufficient information to “assess the private return on education” because they deem that the education system provides “a poor quality education to their children”. They are unwilling to pay or would only pay a low price for education. Education providers on the other hand would not be willing to offer education at a low price because they deem that the education provided is of high quality which corresponds with a high market price. Thus, no economic transaction will be made for families that suffer from adverse selection - they are excluded or under-represented in the education market. Ultimately, the education market will only contain or represent students whose families have properly assessed the value of education.
(e) The government of a low-income country wishes to increase spending on education.
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With reference to Table 1, discuss whether the government should concentrate this increase in spending on primary education. [8]
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Thesis: Yes, the government should concentrate on this increase in spending on primary education.
Table 1 shows that the returns in low-income countries, and the social returns in primary education are the highest. This suggests that the extent of marginal external benefit is the highest, suggesting the welfare loss to society incurred in the primary education market is the greatest. By concentrating this increase in spending on primary education via subsidies or direct provision it will allow individuals to internalize the marginal external benefits of primary education and cause the marginal private cost of primary education to fall. This will result in greater overall consumption of primary education, eliminating the welfare loss to society by the greatest extent compared to the other education levels. From a government’s standpoint, this provides the most returns in realizing its microeconomic economic goals of allocative efficiency and also incurs the lowest opportunity cost. Furthermore, low-income countries primarily produce most of their output in the primary and secondary industries that require workers to be relatively lower-skilled. Workers who obtain professional or doctoral degrees may ironically have fewer job opportunities and may be forced to emigrate overseas to look for jobs instead. Thus, the returns on providing higher education by the government (via increased productivity gains) are enjoyed by foreign countries instead.
Anti-Thesis: The government should concentrate its spending on higher education instead of primary education.
However, based on Table 1, the private returns on higher education are the highest compared to the other two educational levels. Focusing on grooming individuals to attain higher education levels will increase their employability and be in “higher demand by employers”. This will cause a shortage of high-skilled workers that will bring about higher wage rates. This will help to boost overall consumption expenditure in the country which will raise AD. When AD increases, there will be an unplanned fall in inventories that will cause producers to spur production of more output. This will cause real national income to increase and more than proportionately via the multiplier process, achieving higher actual growth. Individuals with lower education attainment may benefit as income is being trickled down via income-induced consumption. Overall material and non-material standard of living of individuals will increase. Furthermore, having a better-trained workforce may help attract more foreign direct investments into the country creating a virtuous cycle of growth and allowing the economy to slowly transition into more knowledge-based industries, gradually increasing its overall economic development.
In conclusion, governments of low-income countries should still concentrate their spending on primary education as it yields the most economic benefits; specific to their stage of economic development. As mentioned, lower-skilled workers would suit the economic profile and jobs available in a low-income country; for example, the production of agricultural goods, textiles, and low-quality manufactured goods. From a microeconomic perspective, it would yield the greatest microeconomic benefit as it helps to reduce allocative inefficiency the most since social benefits are the greatest. However, the government should not neglect spending on other education levels since the quality of its labor and labor productivity is an important determinant to promote greater growth in the future - widely recognized as a strong pillar of long-term growth in developed nations.
(f) Discuss whether equity issues are more important than market failures as a reason for the government to intervene in the market for education. [10]
Market failure is defined as the situation where the free market fails to allocate resources efficiently, resulting in a loss of social welfare. Equity, on the other hand, involves a normative discussion on fair distribution of resources - a notion where necessities (e.g. food, water, shelter, and education) should be distributed fairly and equally to the general population, regardless of their income levels. The education market suffers from various sources of market failures, including the existence of positive externalities and imperfect information. Alternatively, when prices of education were solely determined by free market forces, low-income individuals may be priced out of the market due to insufficient dollar votes that would result in distributive inefficiency.
Thesis: Equity is the more important reason for government intervention, owing to the severity of the problem.
Inequity is prevalent, especially in low-income countries where families are being bounded by financial obligations towards food and shelter and thus deprioritized education. They have to carefully consider the costs of education such as “tuition, books, school supplies” and the opportunity cost of education such as the forgone household income when children pursue education over work. Thus, if the free market determines a high price for education, low-income families would have no effective demand for education resulting in an unjust distribution of necessities. The problem is severe in low-income countries, given that most parents of children do not have the financial resources to send their children to school resulting in a large unfairness in the distribution of education.
Anti-Thesis: Market failure arising in the education market is far more important in determining government intervention in the education market. This is particularly true due to the existence of positive externalities in consumption.
Assuming that individuals are rational and self-interested, they will choose to consume education at an output level that would maximize their private utility. Adopting the marginalist principle, that output level will be at Qp where MPB = MPC. They do not consider positive externalities in the consumption of education. Positive externalities are spillover benefits to third parties that are not involved in the production and consumption of education and are not compensated for. The MEB in education would in the form of higher labor productivity that would contribute to overall higher real national income. The existence of MEB will cause a divergence between MPB and MSB. Given that MSB = MPB + MEB, when MEB > 0, MSB will be greater than MPB. The output level that maximizes societal’s welfare is where MSB = MSC, at output Qs. Assuming that their external costs are non-existent, MPC = MSC. The free market has under-allocated resources to produce education by the amount of QpQs. At Qp, MSB > MSC - this means that the additional social benefit derived from an additional unit of education is greater than the additional social cost incurred for that additional unit. There are more social benefits to be gained by increasing the production and consumption of education. If left to its own devices, there is forgone social welfare that can be further gained by society represented by the deadweight loss area abc. Since by the free market’s doing, resources are not allocated efficiently causing social welfare to not be maximized, market failure occurs.
In determining the most important reason to determine the reason for government intervention, the government should consider various factors. Firstly, the microeconomic priorities of the government should matter. Equity is a normative issue and in low-income nations, pursuing a formal education may not be considered a basic necessity. This is different from Singapore where education is considered a basic necessity and all Singaporeans must undergo at least 6-years of primary education according to the Compulsory Education Act. Secondly, the magnitude of the problem matters. According to Table 1, the social returns to education at all levels of education in low-income countries are always higher than in middle and high-income countries. This would mean that the extent of MEB is the largest and results in the greatest misallocation of resources in the education sector without government intervention. Thus, market failure reasons should be the more important reason for intervention. On the contrary, high-income nations may view it unnecessary to intervene in the market for higher education based on market failure reasons, given that it accounts for the smallest social returns. Ultimately, the most important reason for intervention should be considered based on the nature of the economy, stage of economic development, and microeconomic/macroeconomic priorities of a government; which is unique to each country.
