A classic example of a positive externality arises in the case of
education. Benefits from learning how to read arise only
if the ability to read is widespread. And the construction and
presentation of written materials is only of value if the community is
literate. External benefits of other educational capital also arise.
Acquiring an understanding of economics, for example, is of greater
benefit if there are other individuals capable of appropriate criticism
of one's arguments. Accumulation of skills in other areas will also
yield greater benefits if others have an ability to respond to and
augment the application of those skills.
Also, a way to eliminate poverty is to encourage the poor to acquire
human capital that will provide income and promote human capital investment
in the next generation.
Accordingly, we would expect governments to freely provide minimal basic
education to everyone in the community, ensuring that the basic skills for
useful public interaction will be available. Also, by assuring that everyone
has some minimal level of human capital it can be ensured that, barring
mental difficulties, the poorest in the community will be able to earn
a reasonable income.
At the more advanced level, the positive externalities arising from skills
and knowledge will merit the subsidization of human capital investment
though not its free provision.
In the absence of government intervention, education at all levels will
be supplied by private firms that charge tuition and grant written evidence
regarding the performance of purchasers of their products. Government
intervention at the elementary and high-school level will take the form of
acquisition and consolidation of these private institutions and free
provision of their services. It is reasonable to expect that in a democratic
system the public interest will involve careful regulation of these public
institutions with respect to the quality of their output. And the free
provision of educational services will legitimize the forcing of all children
to attend. Despite this free availability and required attendance, the level
of human capital accumulation will differ across students with behind-the-scene
efforts of parents being an important factor.
With respect to higher education, it makes sense for the educational
institutions to remain independent, with the government supplying insufficient
financing of the services they provide, leaving the balance to be covered by
tuition fees---the lower the required level of tuition, the bigger the
subsidy of the particular educational services provided. To obtain their
subsidies, the institutions would have to satisfy the community as to the
quantity and quality of services provided. And enrolment would be voluntary,
given the particular educational services produced and the tuition charged.
It would also be expected that private unsubsidized production of a narrow
and diverse range of educational services would remain. Decisions as to the
existence and degrees of subsidization would be made at the government level
in response to the views of the public.
It is time again for a test. Think about the issues and have your own
answers in mind before looking at the ones provided.