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In what ways could the provision of higher education be made both more efficient and more equitable?

1)      Intro

2)      Efficiency

a)      Practice

i)        Data

b)      Theory

c)      Points of inefficiency and potential improvement

i)        Of the functional areas of expenditure in the same year, apart from the £4.7 billion spent in academic departments, £1.3 billion was spent in administration and central services, with £788 million spent in residences and catering operations.

d)      Possible reforms

e)      Problems created by the reforms in other areas

3)      Equity

a)      Ideal – do we need more equity?

b)      Theory – why shouldn’t we just use cash transfers?

c)      Points were equity is not 100%

d)      Possible reforms

e)      Clashes with efficiency

Although Cambridge lags behind LSE and Oxford in Economics, Politics and social policy, it is by far the best institution for statistics and philosophy, according to Higher Education Funding Council. Thus it is not surprising then that I will try base my answer to this question relying as much as possible on statistical analysis and add a bit of philosophy into the discussion about equity. I will try to include some economic arguments just to illustrate the statistics, but they are bound to be just remarks of very marginal value J

The higher education in Britain is mostly provided by private institutions, and mainly state funded. There are many recent reforms, including the introduction of a 1000-pound top-up fee and a switch from grants to student loans. This links directly to the growth of people attending universities, it was unsustainable to finance them from the current system.

As social welfare is assumed to be increasing in education the pursuit of efficiency means that more people will be educated with less resources and they will have a better quality education. Bearing these points in mind Bearing this in mind I will now look at the potential points of inefficiency in the education system, how it is possible to reform them and what outcomes could the reforms bring about in other areas, especially in the equity issue of education.

First, there is the allocative efficiency that equips people for the society. The issue here is to produce the right set of values and ideas from the education system in order to make the people maximise the utility they receive from living in the society. This type of efficiency is very important, but the outcome is very hard to measure. One can say though, that constant review of curriculum, introduction of National Curriculum and questionnaires about the relevance of education will all help here. The number of part-time and technical, training institutions is small in the UK compared to the US. Devoting more resources to them should mean that the skill set that people get from the university matches their future job more closely.

There is also an internal efficiency. If one has figured out how much education to provide, internal efficiency is concerned with the running of schools as efficiently as possible. The data for this efficiency is widely available and thus one can conduct a cost benefit analysis. Thus, the most improvements to efficiency are likely going to come from the internal efficiency.

Whatever the different forms of efficiency, the free markets should provide an optimal outcome if they are perfectly working. If it is not the case then intervention might help.

First, education faces serious informational problems. Children normally do not know the value of education beforehand, so there has to be someone defining it to them. This involves problems of agency and asymmetric information. However, in higher education the children are likely know about as much as their parents. The question here then remains whether the state knows more than the family.

Information can be provided by private studies and consumer magazines. They help to produce internal efficiency, as bad schools are not selected. However, it can be argued that for external efficiency reasons, the compulsory schooling and national minimum standards should be introduced.

Secondly, there is an issue of perfect competition. Rural schools are very often national monopolies, meaning that creating competition would be very expensive and wasteful. Thus, state could ensure regulation and impose minimum standards. Furthermore, there are normally no perfect capital markets, because individuals have more information than banks about their ability and motivation. Students can not use their human capital as collateral. State can step in here to either provide or guarantee the loans necessary.

Finally, the most important efficiency loss when produced by private markets in education arises from market failures. The provision of education produces externalities to the society. Higher educated workforce is more productive, has lower crime rate etc. It also has broader benefits: schooling allows parents to work more and common cultural experiences at school can foster future communication. However, if education serves as a signal for future employers, it will have higher private benefits than social benefits and thus is produced in too large quantities.

The optimal outcome of education would be at a point where marginal benefit of extra education just equals the marginal cost of producing it. If the private marginal benefit is lower than the social marginal benefit, society can improve welfare by either subsidising education or to force members to consume the socially optimal outcome. However, there is a Coasian argument, meaning that when property rights can be assigned then optimal outcome will occur through private bargaining. It is unclear, however, whether property rights can be assigned successfully in this case.

It is not clear that education has increasing returns to scale. However, the transaction costs of charging each individual according to usage could be prohibitively high, and at least in theory state could be more effective in reducing these transaction costs than private individuals.

It is clear that all these externalities are already taken into account in the current system. In addition, eliminating inefficiency in the market by means of regulation is very expensive because one looses the allocative information provided by price mechanism and has to support an alternative mechanism. So in the further section I want to argue that the externalities and informational inefficiencies are overcorrected with the present higher education system in Britain, and that state has not sufficiently addressed the need to create an alternative to price mechanism. Thus, from an external efficiency viewpoint it might well be the case that there is too little higher education arising from too much regulation.

The funding of higher education seems not to precede periods of growth and prosperity but to increase in booms. Thus 1960-s was a high time for the university funding, after 1970-s the funds have been decreased. In addition to tuition fees, last year, apart from the £4.7 billion spent in academic departments, £1.3 billion was spent in administration and central services, with £788 million spent in residences and catering operations in the universities. This shows that there is still room for allocating more money to academics from administration, but the administrative expenses are not that large. Now universities are awarded contracts based on each student and there is a separate funding for research.

Empirically, this has seemed to increase efficiency:

The standard has increased whereas the cost per student has fallen. Furthermore, the actual demand for education is actually so inelastic that almost no one chooses to abstain from education due to top-up fees. Thus, no real divergence from previous subsidised (arguably socially efficient) values has been created. However, private markets are allowed to operate and thus there has been an efficiency gain. I think the policy should go on until there is evidence that the society has reached the elastic part of the demand-curve for education. However, there are problems associated with this view, because in the long run the elasticity is bound to be more elastic than in the short-run.

From a macro-efficiency viewpoint it is clear that schools do very little to affect test-scores. Most of the variation is explained by parental income, neighbourhood etc, instead of school funding. It is not clear how much of this applies to higher education, however. With cutting edge research facilities, surely the interest to the subject and the quality of education is raised.

One easy marginal analysis could be conducted by observing the expected discounted future increase  in salaries as a result of extra education. providing more education will be increasingly costly, and will the reduce its marginal advantage. Thus, one should provide it up to a level where they are equal. According to the economist, the expected future increase is in the order of 100 000 pounds over the lifetime for economists, but sometimes even negative for women in sciences etc. Taking the cost of a student of being roughly 30 000 pounds and adjusting for the enjoyment of work which is not monetarily rewarded, then on average it seems that more education is beneficial, although there are no major shortfalls. This ties together with the question about the quality of higher education. At present, every teacher must handle 40% more students than 10 years ago. However, when the inputs do not map directly do outputs this is efficient. If only the fact of having a degree counts then surely one should provide it as cheaply as possible.

Before I get into the main issue of efficiency: the micro efficiency I just want to elaborate a bit more on a few macro-economic inefficiencies that are often left un-noticed. One is the extreme unionisation of lecturers and the military stance of the unions and willingness to force their ideas through strikes and other undemocratic means. If democracy is efficient, prohibiting unions would be beneficial, especially in terms of the extra education that could be gained due to lectures lost in strikes. The other issue is international competition. Diversity and trade create optimal outcomes so if students are free to move if they so wish, then the system is more efficient. Movement has been extended with EU countries and is furthered with other countries as well. Encouraging that process increases efficiency. However, the process here is that UK spends more than almost any other country on its education. Allowing free access to this makes UK worse of, but by a smaller amount than other country benefit. Thus, one needs bilateral agreements to provide the UK with something in return.

The recent microeconomic reform has been concentrating on creation of quasi markets. This means giving more money to consumers and less money to institutions. The main question is whether the students are capable of making better decisions than state. I think being a student the answer is that of course they can, although I could be a little bit biased. The reason is that state will consist of just people like me. Only 30% of them have higher education, whereas I will have higher education.

Whether one should increase competition by voucher systems in not clear. Empirical evidence has so far not supported voucher-systems, however, the liberal economic theory is in favour of them. However, a well-designed voucher system could introduce competition only gradually and to a limited degree, thus not destroying the existing system. They would force universities to spend more time on students than on research.

With the increased sovereignty, capital markets have to provide the loans. In addition, the imperfections in capital markets can easily offset the efficiency gains from increased sovereignty. However, the fact that students would actually have to finance the education themselves eliminates efficiencies associated with third party insurance problems. Students now have an incentive to monitor the quality of education and its cost in the university.

The final topic that is hotly discussed with regards to efficiency is the micro-efficiency of the student loan system. The existing system is much criticised on the basis that it is not much different to the grant system. Alternative system, whereby private finance is involved and firms take risks could be beneficial economically and produce a better outcome if people act rationally. One should however remember that being a student is a very traditional thing and rash reforms will not be politically feasible. Thus, the student loan scheme was designed to be evolving into a proper private loan market, like mortgages. It will take time. Criticising and providing alternative methods is a helpful way to direct the future dynamics, however, it is unlikely going to be feasible to speed up the transition. The current system already provokes student demonstrations, and it is almost the simplest one imaginable.

Turning now to equality, the main point I think is to justify the redistribution of education instead of just cash transfers. The main reason for the transfer of education is that there is no free market for education for efficiency reasons and it should be cheaper to provide the transfers with education, if the government already has to finance it.

The question then is that do we really want an even more equitable system. It is not all clear because surely the system allows access from talent from poor regions and some people need to do the job that does not require a degree. I cannot really imagine a feasible project that forces middle-class people for manual work and substitutes from them lower-class people.

Increasing the supply of education will make the economic rents arising from education a lot less, even if the education is extended only by allowing rich kids to take it up. Thus, just by extending the system will make it more equitable. At present education also has increasing returns to scale, so it will be more efficient as well.

Further ways to reduce inequality would be to look where there is non-market provision of higher education that discriminates. If we define equality as the equality of opportunity then discriminative systems would be defined as ones where different treatment is given to people with the same abilities. One area for example is the introduction of a flat top-up fee and similar funding for all universities. This discriminates against low ability people who would like to receive less and pay less and very high ability people who would like to pay more and receive more. A system with differentiated fees will also resemble the market more closely and thus is likely going to be more efficient than flat fees.

I will now try to look at actual empirical data to find information where discrimination could occur. The classical example was women, however, during the past decade they have outnumbered men in the university. This gives evidence that nothing should be done to correct for equality, as markets will work themselves out once the inequality is discovered. Similarly, in 1997/98 13.4 per cent of first year UK domiciled undergraduates whose ethnicity was known were from ethnic minorities, showing that there is no significant discrimination against them. Do we discriminate against old students? No according to THESIS 50 per cent of first year undergraduates of known age were aged 21 or over in 97/98. How about disability? Of the full time and sandwich students who returned disability information, 4.3 per cent were known to have a disability, which is reasonably close to national average.

Most other ways to increase equality seem to go against efficiency because they distort the market allocation. Giving preferential treatment to poor students, for example, would reduce the allocative effectiveness of the price system, and there are further examples.

Thus, it is clear that the education system has room for improving the efficiency. However, when one takes cultural and political factors into account it appears that the current pace of reform is adequately fast. Of course, we should not forget about equality when reforming the system, however, currently there is very little improvement that can be realistically done to the equality of the system. All future reforms are equality neutral (means tested loan schemes) and as long as they remain so, the reformers can concentrate just on efficiency issues.

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