Friday, 29 February 2008

Public v. merit goods

In an article on the blog of the Adam Smith Institute, Madsen Pirie writes on the idea that A university or college education is a public good that society should pay for. He writes,
There's truth in the first part of this. Most of us prefer a society with educated people in it, and benefit from it. Educated people can provide services for us, and create the jobs and wealth for the future. They often also add a certain civility which enhances the lives of others.
I don't see the truth in the first part of the article's title. Even if the quoted text is true that doesn't make education a public good. A public good is a good which is non-rival and non-excludable. Put simply this means that the consumption of the good by one individual does not reduce the amount of the good available for consumption by others and no one can be effectively excluded from using the good. Clearly this definition fails for education, as it is easy to exclude people from receiving it, for example.

I'm guessing that what Pirie means is that education is a "merit good". The somewhat odd concept of a merit good was introduced by Richard Musgrave (1957, 1959). A merit good is a good or service which is judged that an individual or society should have on the basis of a norm other than respecting consumer preferences, ie the government forces you to have it. Or sometimes a merit good is thought of as a good which would be under-consumed (and under-produced) in the free market economy. There are, it is claimed, two major reasons for this: (1) When consumed, a merit good creates positive externalities. This means that the public benefit is greater than the private benefit but as consumers only take into account private benefits they will under-consume the good or service (and so it is under-produced). (2) Individuals are myopic, they are short-term utility maximisers and so do not take into account the long term benefits of consuming a merit good and so they, again, under-consume the good.

In the case of education, it can be argued that those lacking education are incapable of making an informed choice about the benefits of education, which would warrant compulsion (Musgrave, 1959, 14). In this case, the implementation of consumer sovereignty is the motivation, rather than rejection of consumer sovereignty (Musgrave, 1987, p. 452). Can't say I buy such an argument. After all, where would it end? Could an argument not be made that nearly any good has some merit/demerit aspect which means we should be force to consume it or forced not to consume it? And why can't people work out that education is good for them? In addition, what are these public benefits from education?

Most of the benefits of education are captured by the individual and not society. If so why should others pay for them? As Pirie puts it,
The main beneficiary of education is the recipient, directly and in measurable ways. The university or college graduate has access to a greater range of fulfilling career opportunities, and has access to much better paying jobs than their uneducated or untrained counterpart. Those who pay towards their education make one of life's very best investments – it repays them many times over in money as well as opportunity.
Pirie then makes the obvious point that education has to be paid for, but paying out of taxes means that those you don't get said education still have to pay for it.
Someone has to pay for tertiary education. Lecturers have to be paid, buildings and facilities maintained. If this is paid out of taxation, it means that taxpayers in general pay for it, rather than just the beneficiaries of it. It means that the person who leaves school to become a casual labourer is paying higher taxes so that someone who is already better intellectually endowed will have access to better jobs and a higher income for life.
At the very least someone should articulate what the taxpayer gets for their money. Or in other words, what exactly are these merit characteristics that education supposedly has which justify funding it out of general taxation?
  • Richard A. Musgrave (1957). "A Multiple Theory of Budget Determination," FinanzArchiv, New Series 25(1), pp. 33-43.
  • Richard A. Musgrave (1959). The Theory of Public Finance, pp. 13-15.
  • Richard A. Musgrave (1987). 'Merit Goods' , in The New Palgrave: A Dictionary of Economics, v. 3, pp. 452-53.

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