Public Finance, econ 232.
Written assignment 11, due Nov. 23.
20 pts.
The financing of education
Suppose that:
1) High-school education is 50% consumption and 50% investment.
2) Half the marginal increase in output from high-school human capital investment goes to the student, and half is a positive externality to society. Thus if high-school education increases the economy’s annual output by $10,000 per worker, $5000 is due to the general higher productivity of the economy from high-school education, and $5000 is due to the greater productivity of the person.
3) Half of the added productivity goes to higher wages, and half the added productivity is captured by higher land rent.
4) With today’s tax structure, half of parents are financially able to fully pay tuition for their children’s education. 25% of parents are able to pay half the tuition, and 25% cannot afford to pay the tuition. The elimination of taxes on wages would enable 75% of parents to pay the full tuition, and 25% of parents to pay half the tuition.
5) The real interest rate on student loans and government borrowing equals the real rate of per-capita growth of the economy.
Based on these premises, design the optimal financing of high-school education from any combination of:
a) tuition paid by parents
b) student loans paid back during the duration of employment
c) government borrowing.
d) taxation (explain the tax structure).