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Externalities and subsidization of higher education

  • Winter, Stefan
  • Pfitztner, Alexander
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    Higher education is subsidized worldwide, although with pronounced differences in levels of subsidization. While public funds account for about 90% of universities budgets in Scandinavian countries, the share of public funds in Great Britain and the US is less that 30%. Subsidization is typically justified by two arguments: It is necessary to enable children from poorer family backgrounds to join universities. The other argument holds that higher education is accompanied by positive externalities. Without subsidization, so the story reads, there would be an underinvestment in higher education. This paper shortly reviews theoretical arguments as well as empirical evidence on externalities. It is found that evidence on positive externalities is quite limited. What is more, evidence on negative externalities of higher education has been mainly ignored so far. If potential losses due to negative externalities are taken into account, there may be much more reason to suppress higher education than there is reason to subsidize it. If subsidization is reasonable at all, it will be reasonable in special cases only. We present a simple model of optimal subsidization and evaluate existing subsidization regimes in the US, Australia and Germany. We demonstrate that any of these regimes has severe shortcomings even if positive externalities are assumed to exist. While the Australian regime of income contingent loans is relatively best, it still offers many opportunities for improvement. We offer some guidance on potential improvements.

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    File URL: http://econstor.eu/bitstream/10419/79993/1/VfS_2013_pid_476.pdf
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    Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79993.

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    Date of creation: 2013
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    Handle: RePEc:zbw:vfsc13:79993
    Contact details of provider: Web page: http://www.socialpolitik.org/
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    1. Gary S. Becker, 1994. "Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education (3rd Edition)," NBER Books, National Bureau of Economic Research, Inc, number beck94-1.
    2. Jerik Hanushek & Dennis Kimko, 2006. "Schooling, Labor-force Quality, and the Growth of Nations," Educational Studies, Higher School of Economics, issue 1, pages 154-193.
    3. Antonio Ciccone & Giovanni Peri, 2003. "Identifying Human Capital Externalities: Theory with Applications," Working Papers 6, Barcelona Graduate School of Economics.
    4. Daron Acemoglu & Joshua Angrist, 1999. "How Large are the Social Returns to Education? Evidence from Compulsory Schooling Laws," Working papers 99-30, Massachusetts Institute of Technology (MIT), Department of Economics.
    5. Alan B. Krueger & Mikael Lindahl, 2000. "Education for Growth: Why and For Whom?," NBER Working Papers 7591, National Bureau of Economic Research, Inc.
    6. Chapman, Bruce & Ryan, Chris, 2005. "The access implications of income-contingent charges for higher education: lessons from Australia," Economics of Education Review, Elsevier, vol. 24(5), pages 491-512, October.
    7. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: a review of alternative approaches," IFS Working Papers W98/18, Institute for Fiscal Studies.
    8. Enrico Moretti, 2004. "Workers' Education, Spillovers, and Productivity: Evidence from Plant-Level Production Functions," American Economic Review, American Economic Association, vol. 94(3), pages 656-690, June.
    9. Daniel Cohen & Marcelo Soto, 2001. "Growth and Human Capital: Good Data, Good Results," OECD Development Centre Working Papers 179, OECD Publishing.
    10. Lance Lochner, 2004. "Education, Work, And Crime: A Human Capital Approach," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(3), pages 811-843, 08.
    11. Sveinbjörn Blöndal & Simon Field & Nathalie Girouard, 2002. "Investment in human capital through upper-secondary and tertiary education," OECD Economic Studies, OECD Publishing, vol. 2002(1), pages 41-89.
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