Economics and Finance of Education
Because education consumes resources, it can be examined as an
economic good.
In Canada about 5 percent of our gross domestic product is spent on
education, somewhat more than in the majority of industrialized
countries.
Traditionally education was looked upon as a consumption good, but
more recently its investment properties have been recognized.
The considerable advances made in the past half-century in the theory
of public goods and public choice have provided additional insights and
have encouraged the independent study of the economics and finance of
education.
It has sometimes been said that education is too important to be left to
the private sector.
But the production and distribution of food is handled almost
exclusively by private individuals and companies, and food must be at
least as important as education.
In Canada most education is publicly financed and publicly supplied for
reasons that have nothing to do with importance.
Finance and supply are logically independent, and the reasons for
public finance and public supply are here examined separately.
The benefits of education are both public and private, which confers on
education the economic status of a mixed good and encourages society to
provide public money to support it.
Education is supplied publicly because of the nature of learning and
teaching.
Elementary and secondary education in Canada is financed almost
entirely by provincial and local governments, with the provinces now
paying most of the bill.
Provincial funds transferred to school boards are supplemented by local
revenue raised by the property tax in those provinces that allow boards
access to this tax.
In the others the province bears almost the full cost.
In the industrialized countries of the world, most elementary and
secondary education is financed publicly through taxation and is
supplied by public-sector organizations.
Certainly this is true in Canada.
But there is no logical connection between finance and supply, and the
reasons for public finance and public supply of education are quite
different.
Of the four possible combinations of public and private with respect to
finance and supply, all four are found in Canada.
Commodities such as most food, clothing, and housing are financed and
supplied privately.
This is the typical case, and there
are countless examples.
The medical services of physicians in private practice are financed
publicly without user charges in all provinces but are supplied by
private entrepreneurs.
Postal services in Canada are financed privately, largely by the sale of
stamps, but are supplied by a publicly owned crown corporation.
The same is true of many publicly owned utilities that charge rates for
electricity, natural gas, or telephone service.
National defence, fire protection, hospitalization, and schools are
financed publicly and supplied publicly.
In the following sections, the finance and supply of education are
examined separately.
Understanding the way in which education is financed and supplied
requires an appreciation of the nature of two kinds of goods, public and
private.
In this context a “good” includes a service such as education.
All goods and services are either public, private, or a mixture of the
two.
Although there may be no such thing as a pure public or a pure private
good, there are excellent approximations to both.
Education has characteristics of both and is probably the best example
of a mixed good.
The consumption of private goods is exclusive and rival.
The exclusion principle requires the feasibility of property rights and
ownership so that to benefit from a good, a person can be required to
pay for it.
Food stores and restaurants can and do require their clients to pay for
what they eat.
Food that consumers do not wish to eat will not be purchased, and
suppliers will soon stop producing it since they cannot sell it at a profit.
This is the market signaling mechanism.
The rivality principle requires that one person's consumption of a good
subtract from that of other persons.
One consequence of an individual eating a hamburger is that all other
individuals are prevented from eating that hamburger.
That individual captures for himself all the benefits of the hamburger,
and if he also pays the full cost to purchase it, his purchase decision
will be based on accurate and complete information about the costs and
benefits of the hamburger.
The purchase will be rational in the economic sense.
Paul A. Samuelson, a Nobel–Prize–winning economist, has defined a
collective or public good as one for which “each individual's consumption
of such a good leads to no subtraction from any other individual's
consumption of that good” (387).
A common example is clean air.
Consumption is non-rival since the breathing of one person does not
subtract from or interfere with the breathing of other persons.
The exclusion principle
cannot be applied in that air cannot normally be
bought or sold because it is not possible to establish property rights to
it.
We must therefore consume air jointly, and in any community all
persons will breathe air of the same cleanliness.
But clean air is not a perfect public good since air can be cleaned within
a building and the owner of a building is, for practical purposes, the
owner of the air within it.
A large number of people breathing in a building can interfere with the
breathing of others by making the air stale.
Air can be compressed into tanks, and a person with a specially
equipped mask can breathe only air from the tank and prevent others
from breathing air from the same source.
The owner of the tank owns the air inside it and can sell it.
But in spite of the technical ability to breathe privately, most people
breathe publicly and must co-operate with others through organizations
like governments to obtain clean air.
The public–good problem centers around the fact that no one individual
receives a large enough part of the total benefit of clean air to justify a
private investment in cleaning it or keeping it clean.
Gurwitz (22) uses the example of plowing a cul-de-sac to illustrate the
allocation problem with public goods.
We assume that in an area without municipal organization several
families live at the end of a street and must arrange for plowing the
snow from the street.
The question is how much plowing to contract for.
The plowing is a public good since all persons in the cul-de-sac can use
the plowed street and its use by one person does not interfere with its
use by others.
A person with an ordinary car might want the street plowed as soon as
the snow depth reaches five centimetres, whereas the person with a
four-wheel-drive vehicle would prefer to wait until there is at least 20
centimetres.
But consumption is joint and only one snow level can be chosen
(Gurwitz, 23).
Suppose that the households do not collaborate and that no
resident takes the others' expected behavior into account in
deciding how much plowing to arrange for.
Each household contracts for a certain amount of plowing.
Some contract for plowing whenever a little snow falls.
Others contract for plowing only when the snowfall is heavy.
The result is that when a heavy snow falls, several plows
arrive to clear the cul-de-sac.
Clearly this is inefficient.
Consider another possibility.
Suppose that the residents still do not collaborate but that
each takes the others' expected behavior into account.
Each reasons, “The others are likely to arrange for plowing
and therefore I don't have to bother to make my own separate
contract.” Since everyone thinks this way, no one contracts
for snow plowing and the cul-de-sac is never plowed.
This, too, is an inefficient outcome.
A larger collectivity would probably form a government and vote, but a
group of people small enough to live at the end of a street will likely
bargain among themselves.
Those who do not want very much plowing may expect to pay less than
those who want more.
This creates an incentive to understate one's desired quantity of
plowing to reduce one's share of the cost.
Consequently, an inefficiently small amount of plowing may result from
the bargaining, but the solution is probably going to be better than that
resulting from not collaborating.
Even the formation of a government does not guarantee a completely
efficient solution.
If clean air is a public good, then polluted air must be a public bad, and
this term is sometimes used.
Just as private citizens cannot make efficient decisions on expenditures
for clean air because of shared benefits, private companies cannot make
efficient decisions on how much pollution is acceptable because most of
the cost of pollution will not be borne by the company.
Companies left on their own will under invest in pollution control
equipment.
The properties of a public good have to do with both the costs and
benefits of the good (or bad).
Benefits conferred upon, and costs imposed upon, third parties are often
referred to as external benefits and external costs respectively, and
together as externalities.
The third parties neither receive nor pay compensation for their costs
and benefits.
Public goods are goods with externalities.
The Nobel-Prize-winning economist, Milton Friedman, calls
these “neighbourhood effects”, which he defines as
“circumstances under
which the action of one individual imposes significant costs on other
individuals for which it is not feasible to make him compensate them, or
yields significant gains to other individuals for which it is not feasible
to make them compensate him.” (85–86).
He notes that these circumstances make voluntary exchange
impossible.
Language is a good closely related to education that is characterized by
important neighbourhood effects.
The value of our ability to speak, read, and write depends heavily on
the ability of others to do the same in a way that is understandable to
us.
We could each be literate in a private language that we could use to
write notes to ourselves, but this would be far less useful than being
literate in the language in which this book is written, for example.
Peston (186) refers to this as part of the class of communication
externalities.
Education is a mixed good because it has substantial private benefits
and substantial public benefits.
The discussion so far has equated benefiting from a good with
consuming it, and with goods such as food this is an
excellent
approximation.
But the public or private nature of a good has to do with bearing the
costs or enjoying the benefits rather than consuming the good.
For education this is not a trivial distinction.
The public-good property of education depends on benefits being
conferred on individuals other than those who actually receive the
education, and this makes these benefits non-exclusive.
Establishing property rights in schools is no more difficult than
establishing them in a theatre or cinema.
Students can be charged for their education, and in some schools they
are.
The difference is that the person who views a movie is presumed to
have a monopoly on the benefits of the viewing.
That person enjoys watching the show and may enjoy thinking about it
later, but society as a whole gains nothing.
If these assumptions are satisfied, the private market can efficiently
allocate resources to film production and movie houses.
But the child who attends school emerges and receives some benefits
but cannot help but confer other benefits on society.
If allowed to determine the level of investment in the child's
education, the child's family acting rationally will base the
decision on family costs and family benefits and will not consider
the public benefits.
Without a monopoly on the benefits, the family will under invest in
education.
To ensure adequate investment in education, families must organize
themselves, impose taxes on themselves, and subsidize schools.
In Canada in the nineteenth century and earlier, school boards were
formed as the first type of local government in many areas in just this
manner.
The benefits of education have been widely studied using the
public-private dichotomy and other characteristics that help clarify the
nature of these benefits.
Benefits of education may be monetized or unmonetized.
Higher salary is a monetized benefit, and better working conditions are
unmonetized.
Monetized benefits can be measured in dollars and are much easier to
measure than unmonetized ones.
Consumption benefits are distinguished from investment benefits.
The consumption benefits occur as one consumes or receives the
education, whereas the investment benefits occur later.
Consumption benefits are normally unmonetized, but investment
benefits can be of both types.
The most obvious benefit of education and the one studied most
frequently is that of higher income.
For analytical purposes, private benefits are often equated with
after-tax income, and public benefits with income tax.
Total benefit equals total income.
Rates of return to education can be determined for both the individual
and society by treating the cost of education as an investment in higher
future income and calculating the interest rate on the cost required to
yield the observed increment
in income.
Holmes reports rates of return to secondary education in Canada of just
over eight percent and to university education of just under eight percent.
International studies (Psacharopoulos, 1981) have shown generally
higher rates of return to lower levels of education.
The return to elementary education is typically the highest, but this can
no longer be calculated in Canada because there are not enough
individuals in the population without any education to provide the
necessary base against which to compare the salaries of persons with
only elementary education.
The labour market, besides paying money wages, rewards workers with
safe and pleasant jobs and with explicit fringe benefits.
These appear to increase with increasing education to the extent that
rates of return based solely on wages must be increased by 10 to 40
percent of their original value to account for these additional benefits
(Haveman and Wolfe, 382).
Education at the lower levels provides immediate unmonetized private
benefits to parents by virtue of the custodial function of schools which
permits parents to work or enjoy additional leisure.
This benefit disappears as soon as children become old enough to look
after themselves and turns negative when they are old enough to work.
The lost or forgone earnings of older children who could be working but
are in school are counted as a cost of education.
This is called an opportunity cost.
In industrialized countries the transition from custodial benefit to
opportunity cost probably occurs in adolescence, but in poor countries
very young children have enough economic value performing domestic
and agricultural chores that compulsory attendance may be difficult to
enforce.
Educated persons are believed to be better and more efficient consumers
and to make better use of their leisure time.
Research has shown that more education has an effect on consumption
patterns that is similar to the effect of more income (Haveman and
Wolfe, 385).
The dollar value of this is not known.
There are large numbers of unmonetized personal and family benefits of
education that are known but have never been valued.
These include more efficient job search behaviour, lower mortality,
better personal health, better health of other family members, greater
likelihood of the attainment of desired family size, better child-rearing
practices, and greater efficiency in non-market production, which
includes such at-home jobs as cooking and do-it-yourself maintenance.
There are also public benefits for some of these.
Good health and appropriate child-rearing practices provide benefits for,
or avoid imposing costs on, society.
The most important public benefits of education have to do with society
and government.
Education promotes the most basic functions of government, namely
security and justice.
Social cohesion and the prevention
of civil strife are so important that
these are frequently cited alone to justify full public funding of
elementary and secondary education.
Not a few countries have national unity as the number one objective of
their public school systems.
Literate educated citizens vote with greater knowledge and care and
generally facilitate the functioning of a democracy.
They adapt better to technological change.
They are better at filling out income tax forms and are less likely to
commit crimes.
Educated persons are thought to make better neighbours.
These are clearly public goods; many cannot even be defined with
respect to an individual.
They are also next to impossible to place a dollar figure on.
After reviewing 104 studies of the benefits of education, Haveman and
Wolfe (1984) speculate that the unmonetized benefits of education are
about equal in value to the monetized ones.
If true, this would substantially increase reported rates of return to
education.
The public–good properties of education require a strong element of
public finance to ensure that an adequate amount of education is
supplied, but public goods can be supplied either publicly or privately.
A small proportion of Canadian schools are private (mainly non-profit)
organizations, but the vast majority are public.
Many poor countries started out supplying education privately by
default.
Governments simply did not take any role in education, either in
finance or supply.
Eventually they became involved in the finance, often with the purpose
of promoting national development, and this was followed very quickly
by involvement in supply.
Some of these countries nationalized their private schools.
Why is education supplied publicly when it could very easily be supplied
privately? More generally, why is anything supplied publicly? Niskanen
(1971) argues that the deciding factor is the nature of the goods or
services.
“The primary functional reason for choosing bureaus to supply these
services, I suspect, is the difficulty of defining the characteristics of the
services sufficiently to contract for their supply.
This difficulty leads collective organizations directly to organize the
supply of these services, hoping to substitute incentives associated with
loyalty to the collective organization for the motivation
of profits.” (20).
Loyalty can be important as a substitute for the profit motive, especially
in military organizations, but in schools professional motives are even
more important.
Niskanen's reasoning finds strong support in the outcome of the
performance-contracting experiments in the United States in the late
1960s and early 1970s (Carpenter).
These experiments, conducted in various
American states with federal
funds, involved the contracting of instruction in schools to private firms.
All attempts to do so eventually ended in failure, and performance
contracting has not continued.
The inability of school boards to successfully contract for instruction
reveals a surprising dichotomy.
These same boards routinely contract for school construction, pupil
conveyance, cafeteria services, snow removal, school and office supplies,
and caretaking services without encountering any unusual problems.
Yet they are incapable of writing or administering a contract for
instruction.
The difference concerns the very nature of teaching and learning.
Successful contracting requires a clear knowledge of actions and
consequences related to the subject matter of the contract, that is, of
means–end relationships.
In education this clear knowledge does not exist.
How do you teach a person to be a good neighbour, vote carefully,
abjure crime, and adapt to technological change, and how are these
things learned? The answers do not jump out at you.
It may matter which learner and which teacher you are talking about.
Similar difficulties arise in teaching and learning employability, the
productive use of leisure time, and good personal health.
Part of the problem results from the very long product cycle involved in
the production of education.
In a modern industrial country, educating an individual takes from 9 to
20 years and even 9 years is much longer than the time required to
manufacture nearly all goods or perform nearly all services.
Society requires that this education benefit the individual and society
for 45 or more years.
We receive feedback on the results of education very slowly, and this
feedback must be interpreted with caution because of the historical and
technological changes that take place over such a long period.
A necessary consequence of this is that today we educate children to
function in a future world about which we know very little.
The free market provides quick feedback to the manufacturers of shoes
and automobiles that permits them to improve their products or
abandon them if necessary.
Such precise and timely feedback is simply not available to educators.
Another barrier to the clear understanding of means–end relationships
in education is the active involvement of the learner in the learning
process.
Instructional techniques may not function similarly with different
individuals.
Some persons find learning easier than others, and now that severely
handicapped children are finding their way into regular classrooms, we
are coming to appreciate the full range of human abilities and
disabilities.
On top of the ability to learn we must add the will to learn.
At a given ability level the child with a positive attitude to learning and
knowledge may do much better than one with a negative
attitude.
Responsibility for learning is partly voluntary and partly involuntary
and is jointly held by the teacher and the pupil.
Contrast the role of the educator's client with that of the surgeon.
The surgeon's client is drugged into a state of passivity to the point
where he or she cannot even observe the delivery of the surgical service.
The patient's responsibility for the outcome of the surgery is minimal.
Performance contracting failed because of the impossibility of judging
the quality of educational output within a reasonable time frame.
The problem is not that contractors cannot do a good job of educating
but that those responsible for enforcing the contract cannot distinguish
a good job from a poor one.
Standardized tests were used as an output measure in these
experiments in the absence of a better alternative.
Although such tests have important uses, they really do not measure
achievement of the broad objectives of education over the long term.
Using standardized test results as a proxy for the achievement of broad
long-term objectives distorts teaching in the direction of test-taking
success at the expense of the very important long–term objectives.
The comparison of teachers with surgeons in the previous subsection
can be carried further to clarify the supply characteristics
of education.
Although both teaching and surgery are publicly financed in Canada,
teachers are public-sector employees while surgeons are private
entrepreneurs.
The private supply of surgical services is characterized by the
client's ability to choose a supplier and by the surgeon's
income being determined by the client's exercise of that choice.
No one would claim that surgeons are motivated entirely by profit, but
the profit motive is present in a way that is unknown in teaching.
Teachers are unable to profit financially from good teaching, nor are
they penalized financially for poor teaching.
Financial rewards may attract a person into teaching or push a person
considering teaching as a profession into a better-paying profession, but
once a person has chosen to be a teacher, financial rewards have little
to do with teaching performance.
Although parents can and do choose doctors for their children, they
cannot normally choose teachers.
Parents insist on the right to take their children to medical doctors of
their choice, and if they also insisted on this right with respect to
teachers, they would certainly have it.
Are parents better judges of doctors than of teachers?
The answer is yes.
Comparing surgery with teaching reveals that surgery has means–end
relationships that are much better understood than those for education.
The surgical product cycle is shorter, and feedback on the results of
surgery are both more rapid and more precise than is the case with
education.
As noted earlier, the surgeon is responsible for the surgical operation,
whereas the teacher and student are jointly responsible for the
student's education.
Parents are content to let public-sector bureaucrats choose teachers for
their children because parents recognize their inability to make better
choices themselves.
Surgeons and teachers differ considerably in the extent to which they
are held legally responsible for careless professional practice.
Successful malpractice suits against surgeons are common, but no suit
against an educational institution or teacher for failure to educate has
ever succeeded.
This must be distinguished from suits for negligence that results in
injury or death to students and that occurs because of lapses in the
custodial rather than the educational function of teachers.
Parents find it difficult to judge teacher performance, and courts have
exactly the same problem.
Recently some authors have recommended that teachers be held liable
for professional malpractice in the same way as surgeons and have
minimized the problems involved (Foster).
But teachers have been around longer than surgeons, and this
generates the obvious question.
Why have teachers not been held liable in the past for failure to
perform their educational function to some minimum standard?
The reasons are similar to those given for supplying education publicly,
that is, the difficulty of judging the success or failure of an educational
process until long after it is completed and the difficulty of dividing
responsibility for learning between the student and the teacher.
To these we can add the difficulty in holding any individual teacher
responsible given the number of teachers a student comes into contact
with.
Also, teachers in the public sector have less autonomy in the practice of
their profession than do surgeons (Covert), and it becomes difficult to
distinguish the negligence of the teacher from that of the school board
or provincial ministry of education.
School systems are more likely to be held legally responsible for
incorrectly classifying students and directing them to inappropriate
programs than for failure to educate.
But the single attempt to do so failed.
The Board of Education of the City of New York was held responsible
for a classification error in the “Hoffman . . .”
case by a lower court, but this was reversed by the state court of
appeal.
Hoffman was tested by a board psychologist upon entering
kindergarten, was found to be mentally retarded, and was placed in a
class for mentally retarded children.
The psychologist, being uncertain of his test results because of a speech
impediment exhibited by the child which interfered with the testing,
recommended
that the child be retested within two years.
This was not done, and the child was not retested for 11 years, and
then only at the request of his mother.
At this point he was found to have normal intelligence.
The negligent omission recognized by the lower court was the failure to
retest as recommended by the psychologist, but the Court of Appeals
felt that it could not, as a matter of principle, substitute its judgment
for that of school officials.
It reversed the decision and found the board not negligent.
Routine continuous or frequent evaluation of students should avoid the
problem encountered by the New York board in this case.
Exit, Voice, and Loyalty
is the title of a book by Albert O. Hirschman that explains public
response to goods and services supplied publicly and privately.
A person dissatisfied with a certain brand of bread or cheese will
respond by “exiting”, that is, by giving up that brand in favour of
another brand.
This response is expected with privately supplied goods where a choice
exists.
Parents dissatisfied with their child's doctor can change doctors.
In neither example is the consumer likely to pressure the supplier to
change the nature of the good or service.
Consumers will respond differently to dissatisfaction with publicly
supplied goods for which there is no alternative supplier or for which
private supply is available only at a much higher price.
Since exit is not an option in the case of the public schools, parents will
use voice.
This means writing or talking to the teacher, principal, superintendent,
school board member, or minister of education to bring about change in
the public schools.
Parents may even organize lobbying groups to apply pressure on the
public education establishment.
Schools can and do change but find it difficult to satisfy a public with
diverse and often conflicting demands.
Schools respond to voice by attempting to minimize the number of
people offended and the degree to which they are offended.
As a consequence, public education represents a compromise that is
broadly satisfactory to the majority of people but that is completely
satisfactory to very few.
Attempts to promote competition and private supply in education by
various schemes to subsidize private schools are greeted with strong
support from a minority who are disaffected with the public schools and
with apathy by a large majority of people.
Dissatisfaction with public schools has never been strong enough to
threaten their existence.
Society has chosen to shield teachers from the profit motive and to
substitute in its place other motives.
Teacher education programs develop and reinforce other motives for
good teaching performance.
At an
explicit level, these programs attempt to give prospective teachers
the skills necessary to teach well, but the implicit message is that
teachers should want to optimize student learning, that is, to teach
well.
Without this assumed desire, the programs make little sense.
Teachers can be motivated by the appreciation of their students and the
respect of their peers.
A successful teacher education program will use self-fulfilment motives
to encourage student teachers to teach well.
Certain insights can be gained from examining education—or, more
precisely, schooling—from the economic perspective of a manufacturing
process.
Manufacturing firms take raw materials and transform them into
finished products using capital and labour.
Capital and labour are called factors of production.
A third traditional factor is land, but this is often combined with capital
in modern analyses and this practice will be followed here.
Conceptually, the capital needed for producing education differs little
from that required for producing shoes.
Land and a building are required along with furniture and machinery.
Comparing schools with shoe factories, we observe that schools may
have buses and usually have more land because of the presence of
playgrounds and sports fields adjacent to the school buildings.
Shoe factories, however, have more machinery than schools.
Both operations require labour but the shoe factory will hire mainly
unskilled and semiskilled labour while the school hires more
professional labour, mainly teachers, than any other type.
Both require managers, clerks, and custodians.
The raw materials and the final product differ substantially from shoe
factories to schools.
A shoe factory takes leather, rubber, and fabric and produces shoes.
The school takes in uneducated children as the raw material and
produces educated children as the final product.
To value the output of a factory, the cost of the raw materials is
subtracted from the price received for the final product to produce what
is called “value added”.
The benefits of education can be seen as the value added to the
children.
Rate of return analysis examines the value added to the child in terms
of the increased income corresponding to increases in years of
education.
This is conceptually correct, but as we have already noted, increased
income does not measure all the benefits of education.
Economic activities are often characterized as being labour intensive
or capital intensive by measuring the amount of invested capital per
worker.
This has been studied for education by the Economic
Council of Canada
(Cousin et al.), but the study is now more than 20 years old and the
dollar values are no longer interesting.
One surprising result was the considerable variation from province to
province in the amount of capital per student and per teacher.
Compared to other productive activities, elementary and secondary
education appears to be about average in capital intensity.
It is more capital intensive than financial services such as banking and
insurance and less capital intensive than utilities such as electrical
power generation and natural gas distribution.
This area is one that needs more study.
Revenue for education comes from all three levels of government and
from the private sector.
At the post–secondary level students pay tuition fees, and at all levels
educational institutions receive small amounts of income from other
private sources in the form of donations and fees for miscellaneous
services.
But most revenue comes from governments.
In Canada at the elementary, secondary, and post–secondary levels;
the provincial contribution is 62 percent and the local contribution 20
percent.
The remaining 18 percent is divided equally between the federal
government and private sources.
In many provinces the property tax specifically generates revenue for
school districts and municipalities.
Typically, school boards estimate their expenditures within provincial
restrictions, if any, and determine the amount that must come from the
property tax.
This is distributed among the municipalities within the board's district
and is collected by the municipal governments to be remitted to the
boards.
Most revenue for education comes from the high-yielding general
provincial taxes such as the personal and corporate income taxes and
the retail sales tax, but in some provinces school boards can directly
levy property taxes.
The property tax is available to municipalities as well for their own
purposes and so does not provide funds exclusively for education.
The property tax is levied on real property such as land and buildings
and is frequently divided into a residential property tax and a business
and industrial property tax with different tax rates and sometimes
different taxing authorities for each.
The tax rate is a proportion of the assessed value of the property levied
annually.
The proportion can be expressed as a percentage or as a mill rate.
A mill rate is per thousand just as a percent is per hundred.
Thus a mill rate of 50 implies that 50 dollars of tax must be paid each
year for every 1000 dollars of assessment.
All provinces control property assessment within their boundaries, but
for historical reasons assessments are not uniform within all provinces.
Those that do not have uniform assessments use assessment
equalization factors to obtain comparable assessment values across the
province for use in provincial funding formulas for school boards.
In the formulas discussed below, “assessment” means either uniform
provincial assessment where this exists or equalized assessment where
uniform assessment does not exist.
Uniform assessment usually means market-value assessment.
Assessed values are intended to approximate as closely as possible the
likely market value or sale value of the property.
Market-value assessment is based on the characteristics of the property
and its actual sale value if it has been sold recently or the sale value of
properties with similar characteristics that have been sold recently.
Relevant characteristics vary but for houses include age, floor area, and
neighbourhood.
Much of education finance as an area of study is concerned with the
mechanisms used by provinces and states to transfer funds to school
boards.
These mechanisms have a number of objectives, including fiscal
equalization, maximization of the local contribution, preservation of
local autonomy, expenditure efficiency, and expenditure control.
Provinces do not give equal weight to each objective, and some
objectives are inconsistent with others.
Provincial expenditure controls reduce local autonomy, and equalization
can be difficult to achieve while maximizing the local contribution.
Canadian provinces have historically given considerable emphasis to
equalization among wealthy and poor boards.
Where the local property tax contributes a major share of revenue, a
poor board is one with a low property assessment per pupil.
Wealthy boards are wealthy because they have high property
assessment, few pupils, or both.
Typically, urban boards are wealthier than rural ones, but rural boards
with considerable vacation property may be wealthy, not because of
high assessments but because most vacation properties do not have
children who are resident during the school term.
Equalization can be achieved by several funding mechanisms.
The most important determinant of the provincial contribution to any
board is the size of the board.
The fundamental measure of board size is enrolment.
Occasionally the number of teachers will be used but only if the
pupil–teacher ratio has a prescribed minimum value.
Many funding schemes determine provincial contribution on a per pupil
basis through
complex formulas and then expand this to total
contribution by multiplying the result by enrolment.
Foundation programs involve a provincially prescribed minimum level
of per pupil expenditure and property-tax rate.
Boards are required to levy the prescribed tax rate to yield a per pupil
expenditure that, if below the prescribed minimum level, is
supplemented by the province to bring it up to the minimum.
The percentage-equalizing funding mechanism requires the province to
determine the proportion of per pupil expenditure that it will fund
based on the average per pupil property assessment for the province.
For any given board the actual proportion paid by the province will be
higher or lower than this, depending on whether its property
assessment per pupil is lower or higher than the provincial average.
For each board the proportion is set such that there is a constant
relationship between property-tax rate and per pupil expenditure for all
boards.
Poor boards will collect little from the property tax and will require a
large provincial proportion to bring them up to the per pupil
expenditure corresponding to their tax rate.
Percentage equalization resembles the foundation plan except that no
foundation per pupil expenditure level is set and equalization takes
place over a theoretically infinite range of per pupil expenditures.
Thus, boards can set their per pupil expenditures by setting their
property-tax rate.
Ontario uses a form of percentage equalizing but imposes grant ceilings
and other modifications on the basic structure.
Guaranteed valuation funding schemes incorporate a provincial
guarantee to boards that they can raise revenue as if they had a
provincially designated property assessment per pupil.
Boards that actually have a property assessment per pupil lower than
the guaranteed level will have their shortfall in revenue made up by the
province.
Guaranteed valuation is mathematically equivalent to percentage
equalizing.
Provinces with zero or low municipal contributions use some form of
budget-approval funding under various names.
Basically, the province examines the budget of each board along with
measures of need and board size and then prescribes a budget, usually
a modification of one submitted by the board.
Budget-approval funding plans may involve formulas for some items but
are rarely completely formula based.
Budgeting and accounting by school boards are repeated in yearly
cycles, called budget cycles.
After the end of the fiscal or financial year, which may or may not
correspond to the school year, a board closes the books on the previous
year and produces an annual financial report including
revenue and
expenditure statements and a balance sheet.
This is audited by the provincial auditor or a private auditing firm and
submitted to the provincial ministry of education.
Shortly afterward the board will prepare a budget for the next year,
and in the meantime it operates out of the current year's budget.
All provinces exert some control over board budgets, with the amount of
control increasing with increasing proportionate provincial
contribution.
Budgeting and accounting by school boards are done with provincially
prescribed category systems.
These vary from province to province, but three major categories of
expenditure are recognized by all.
Ordinary current or recurrent expenditure covers the operation of the
system and includes everything not assigned to the other two
categories.
Capital expenditures are made for large items such as schools and
major pieces of equipment and vary considerably from year to year
depending on enrolment changes and the age and condition of existing
schools and equipment.
Pupil transportation is separated from recurrent expenditure because it
is the only major recurring item that does not depend directly on the
number of pupils.
Recurrent expenditure is the largest category and is subdivided into
sub-categories such as teacher salaries, other salaries, instructional
supplies, repair and maintenance, and central office, among others.
Exact titles and definitions depend on the province.
Public goods are goods for which the benefits accrue to the public and
for which it is either impossible or inefficient to levy user
charges.
Clean air is a commonly used example.
Private goods are those for which property rights can be established,
permitting the owner to capture all the benefits of the good.
When private individuals face all the costs and all the benefits of a
good, their purchase and consumption decisions will be rational.
Education does not meet this test.
Although it has substantial private benefits, it also has substantial
public benefits.
As such, education is a mixed good, and at least some public finance is
required to prevent under investment.
Besides being largely publicly financed, most education is supplied
publicly.
The popularity of publicly supplied education results from the nature of
teaching and learning.
The means–end relationships in education are not well understood, and
education's very long product cycle makes it difficult to improve our
understanding of them.
The profit motive has proven unsuitable for education because of the
difficulty of judging the output of schools.
Instead, education is supplied by public bureaucracies, which substitute
professional motives and loyalty for profit.
Revenue for elementary and secondary education in Canada comes
largely from provinces and municipalities.
Federal involvement is minimal.
In many provinces, school boards are permitted to levy the property tax
to raise money for education locally.
This is supplemented by funds transferred to boards by the provinces
using a variety of funding mechanisms.
-
Some countries, including some poor ones, spend more than 10
percent of their gross national product on education.
Should Canada increase funding to reach the 10 percent mark?
If so, what should we spend less on?
-
In view of the private benefits of education, should secondary schools,
for example, be permitted to charge tuition fees?
Should tuition fees be increased, reduced, or eliminated at universities?
What are the advantages and disadvantages of charging tuition?
-
Do you prefer to associate with, and live around, well-educated
persons or poorly educated persons?
What difference does it make?
-
Should an effort be made, perhaps through rigorous provincially
imposed testing programs with before-and-after measures of ability and
achievement, to hold teachers legally responsible for their pupils
achieving minimum levels of educational progress?
-
Should all provinces fully assume the costs of elementary and
secondary education?
What are the pros and cons of eliminating the local contribution?
Among the general references on the economics part of this chapter are
Musgrave and Musgrave on public finance and Cohn on the economics
of education.
The two Psacharopoulos articles examine rates of return to education in
general and on an international basis, whereas Holmes looks at
Canada.
The Niskanen books provide insight into the emerging field of public
choice economics.
The book by Cousin et al. is worth examining for its approach to the
economic aspects of education, but its empirical findings are dated.
Gurwitz provides good coverage of education finance generally, while
the Council of Ministers publication, which has begun to appear
annually, covers the education finance provisions in the Canadian
provinces.
Jargowsky et al. discuss the mathematics of educational finance funding
formulas and prove the equivalence of percentage equalizing and
guaranteed valuation.
The two Statistics Canada publications provide quantitative
information.
Bezeau, Lawrence M.
(1986 06).
“Level and inequality of per pupil expenditure as a function of finance
centralization”.
Alberta Journal of Educational Research.
32,2: 80–90.
Carpenter, Polly.
(1972).
“An evaluation of performance contracting for HEW”.
Levine.
3: 35–48.
Cohn, Elchanan.
(1979).
The Economics of Education
(revised ed).
Cambridge, Massachusetts: Ballinger Publishing.
Council of Ministers of Education, Canada.
(1986 12).
The Financing of Elementary and Secondary Education in Canada.
Toronto: author.
Cousin, J.; Fortin, J.P.; and Wenaas, C.J.
(1971 10).
Some Economic Aspects of Provincial Educational Systems.
Ottawa: Economic Council of Canada.
Covert, James R.
(1987 03).
“The profession of teaching: A reply to Professor Foster”.
Canadian Journal of Education.
12,1: 214–217.
Demsetz, Harold.
(1970).
“The private production of public goods”.
Journal of Law and Economics.
13: 293–306.
Foster, William F.
(1986 05).
“Educational malpractice: Educate or Litigate”.
Canadian Journal of Education.
11,2: 122–151.
Foster, William F.
(1987 03).
“Educational malpractice: A rejoinder”.
Canadian Journal of Education.
12,1: 218–228.
Friedman, Milton.
(1962).
Capitalism and Freedom.
Chicago: University of Chicago Press.
Gurwitz, Aaron Samuel.
(1982).
The Economics of Public School Finance.
Cambridge, Massachusetts: Ballinger Publishing.
Haveman, Robert H. and Wolfe, Barbara L.
(1984).
“Schooling and economic well-being: The role of nonmarket effects”.
The Journal of Human Resources.
19,3: 377–407.
Hirschman, Albert O.
(1970).
Exit, Voice, and Loyalty.
Cambridge, Massachusetts: Harvard University Press.
“Hoffman v. Board of Education of City of New York” (Appellate
Division).
(1978).
New York Supplement
(2d).
410: 99–119.
“Hoffman v. Board of Education of City of New York” (Court of Appeals).
(1979).
New York Supplement
(2d).
424: 376–380.
Holmes, R.A.
(1974 12).
Economic Returns to Education in Canada.
Ottawa: Statistics Canada.
13-556:.
Institut International de Finances Publiques (ed).
(1966).
Public Finance and Education.
Paris, France: author.
Jargowsky, Peter; Moskowitz, Jay; and Sinkin, Judy.
(1977 Fall).
“School finance reform: Decoding the simulation maze”.
Journal of Education Finance.
3,2: 199–213.
Kendrick, John W. (ed).
(1984).
International Comparisons of Productivity
and Causes of the Slowdown.
Cambridge, Massachusetts: Ballinger Publishing.
Kuch, Peter and Haessel, Walter.
(1979 03).
An Analysis of Earnings in Canada.
Ottawa: Statistics Canada.
99-758E:.
Levine, Donald M. (ed).
(1972).
Performance Contracting in Education--An Appraisal.
Englewood Cliffs, New Jersey: Educational Technology Publications.
McKenzie, Richard B. and Staaf, Robert J.
(1974).
An Economic Theory of Learning.
Blacksburg, Virginia: University Publications.
Musgrave, Richard A. and Musgrave, Peggy B.
(1984).
Public Finance in Theory and Practice
(4th ed).
New York: McGraw-Hill.
Niskanen, William A.
(1971).
Bureaucracy and Representative Government.
Chicago: Aldine Atherton.
Niskanen, William A.
(1973).
Bureaucracy: Servant or Master?
London, England: Institute of Economic Affairs.
Peston, Maurice.
(1966).
“The theory of spillovers and its connection with education”.
Institut International . . . .
(1966).
184–205.
Psacharopoulos, George.
(1981 10).
“Returns to education: An updated international comparison”.
Comparative Education.
17,3: 321–341.
Psacharopoulos, George.
(1984).
“The contribution of education to economic growth: international
comparisons”.
Kendrick.
(1984).
8: 335–356.
Psacharopoulos, George and Hinchliffe, Keith.
(1973).
Returns to Education: An International Comparison.
San Francisco, California: Jossey-Bass.
Richards, Donald M. and Ratsoy, Eugene W.
(1987).
Introduction to the Economics of Canadian Education.
Calgary: Detselig Enterprises.
Samuelson, Paul A.
(1954 11).
“The pure theory of public expenditure”.
The Review of Economics and Statistics.
36: 387–389.
Statistics Canada.
(1994).
Education in Canada.
Ottawa: Minister of Industry, Science and Technology.
81–229. (annual).
Statistics Canada.
(1994).
International Student Participation in Canadian Education.
Ottawa: Minister of Industry, Science and Technology.
81–261. (annual).
Warren, P.J.
(1986).
Local Taxation for Education in Newfoundland and Labrador.
St. John's: Memorial University of Newfoundland.
© Lawrence M. Bezeau 2007