Education Spending and Positive Externalities

The state of Wyoming incurs an expenditure of about $300 million each year on the sector of higher education. The state provides generous Hathaway Scholarships as situation that could be termed as positive externality from the high level of education spending. This paper looks at the positive externalities in education spending in the state of Wyoming in the United States of America. Positive externalities consist of the benefits that are entirely infeasible for the producers to charge. The higher education sector can be said to provide adequate positive externalities for the subsidy in the state to make economic sense. The higher education sector pays grants to public institutions in the Wyoming state to offer education to the public. The market forces of demand and supply for education services may not be allowed to take charge since this may create problems economically. Negative externalities may arise if the subsidies provided in education may be terminate given the higher priority given to private institutions of higher learning in the United States.

Several positive externalities that the state of Wyoming could initiate through its provision for education subsidies on higher education exist. College education is termed as critical for the development of individual economic status as well as personal mental abilities. The positive externalities are said to be suboptimal given the case of the entire United States as a country. Education subsidies have led to the attraction of college graduates from other states. The ambiguity in this case of externalities resulting from state subsidy provision is the amount of subsidies that should be added to strengthen the positive externalities (Shields, 13). The subsidies are lower to a point of not being in a position to achieve the optimum level of positive externalities. The aspect of positive externalities from education subsidies is influenced by the US practice of free riding on the investment of other countries in higher education according to Shields (13). Shields (13) asserts that immigrations could have an impact on the positive externalities resulting from state subsidies on higher education. The external benefits from the state’s higher education can as well be affected by the trade or government policies that are in place. The state mainly aims at increasing the human capital within the state but the institutions of higher learning in the state benefit in other ways that the state may hardly predict. Some of the external benefits include getting enough workers with adequate skills and stop the reliance of immigrants for human capital. Students receiving the subsidized services also gain power financially and economically.

The main aim of the state is to boost the level of literacy in the state but other benefits come about. The state can get worker from other states or other countries by importing human capital. It comes out that the provision of subsidies in higher education would attract more people from within the state to acquire higher education skills that would in turn be useful in developing the state. Given that the locals are highly educated, they would become better off economically. This aspect would ease the government of the state from the obligation of dealing with issues related to unemployment including social crime, illiteracy, and other issue in human development. The external benefits from the education subsidies cannot be compared to a situation whereby the state government leaves the market forces of supply and demand to take chance (Alturas, 10). The forces of demand and supply would involve the private sector whose operation is associated with inefficiencies and high cost. Subsidies mainly benefit the local students but a situation in which the market takes charge, the public sector would be affected negatively. The willingness to pay for public services that are equated in price to those of the private sector would defiantly fall.

In terms of the labor market, the private sector may not be large enough to accommodate all students migrating from the public sector. Given a situation whereby this happens, the quality of human capital produced by the private institutions would be lowered greatly. This problem would be associated with an increased ratio of teacher to student in the private institutions. The subsidies provided to public institution are also used to better the teachers’ compensations whose absence would mean that these teachers or instructors would now migrate to other states or countries to look for better salaries. At the same time, the cost of learning would increase in the private sector due to the increased demand for their education services (Shields, 9). The net effect would then be a decreased quality in education, poor quality human capital throughout the state, decreased productivity, and poor economic development as part of the many negative externalities that may arise.

The issue of positive externalities as brought about by increased state subsidies can be illustrated graphically as shown in the following diagram.

From the diagram, the market forces of demand and supply of education can only produce education of quality q0 when there are no subsidies indicate by s0. The quality of education provided by the public institution would be q1 when the state is providing subsidies s1. Any taxes imposed on the public institutions as indicated by negative subsidies s2 would lower the quality of education to q2. The positive externalities from the subsidies s1-s0 is represented by q1-q0.

Bibliography

Alturas, Dr. Economic Contribution of Wyoming’s Community Colleges. Web. Mar 2011. 16 Apr 2013 <http://www.caspercollege.edu/impact/downloads/2011_statewide_full_report.pdf>.

Shields, Michael P. Why Should State Government Invest in College Education? An Equilibrium Approach for the US in 2000. Web. Jun 2008. 16 Apr 2013 <http://ftp.iza.org/dp3569.pdf>.