STATE PROVISION ESSAY

MICROECONOMICS
[SAMPLE ASSESSMENT MATERIAL (H060/1)]
EVALUATE, USING AN APPROPRIATE DIAGRAM(S), THE EFFECTIVENESS OF
STATE PROVISION AS A METHOD OF CORRECTING EDUCATION MARKET
FAILURE (20)
KNOWLEDGE (DEFINITIONS):

• Market failure is a situation in which the free market mechanism does not lead to an
optimal allocation of resources. Allocative efficiency is when resources are used to
produce the goods and services that consumers want, and in such a way that consumer
satisfaction is maximised. A positive consumption externality is an externality that
affects the consumption side of the market, and in such a way that the social benefit of
the consumption is greater than the private benefit. A merit good is a good that brings
unanticipated benefits to consumers, such that society believes it will be
underconsumed in a free market
APPLICATION / ANALYSIS:
• The market failure associated with consumption of education is well represented
through the use of a positive consumption externality diagram

• It is thought that when individuals in a society decide whether or not to consume a

product like education, they do so based on the private benefit they believe they will
attain from consumption of said product. In the case of education, this is likely to be the
allure of higher incomes (or reduced likelihood of unemployment) that may be easier to
achieve through the use of skills and qualifications earned through education. Such
decision making, however, does not take into account the potential external benefits
that can arise from said consumption, such as the higher tax revenue that could be
earned by the government if educated people were better able to get even higher
income jobs. This is tax revenue that could be spent on the provision of other essential
products such as health services, transport etc… Whilst it is true that some people will
choose to consume education, it is likely that people will only consume enough to
reduce their chances of becoming unemployed, rather than the amount necessary to get
the highest paying jobs. Additionally, they will likely not consume enough to maximise
their innovative capabilities which could limit technological advances. Indeed, many may
not even perceive the full private benefit that consumption of education could bring

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MICROECONOMICS
them (i.e. merit good problem), and so they may get an even lower paying job and
provide less benefit for society in the future
• As a result, the social benefit is much greater than the private benefit resulting in MSB
being greater than MPB. The free market equilibrium will result in a price of P0 with
quantity of Q0, which are both lower than the allocatively efficient price and quantity of
P* and Q* that occur when MSB = MSC. The shaded (green) triangle of ABC represents
the size of the potential welfare gain (or welfare loss) to society, occurring due to the
underconsumption of education of level Q* - Q0

• The diagram above shows how the government could solve this market failure through
the state provision of education. With state provision, the government would supply all
the resources necessary for education (represented by the fixed supply of S) and likely
make the usage of this service compulsory. When governments’ provide services, they
typically do so free at the point of consumption, and so P* is equal to 0, resulting in Q*
quantity of the product. This Q* is the same Q* as the previous diagram and so it stands
to say that the government, through state provision, has not only resolved the market
failure, but done it in such a way that there is no price exclusion and so that all social
benefits have been considered
EVALUATION:
• It must be noted, however, that there are potential hindrances to the effectiveness of a
policy like state provision, which may reduce its ability to correct the market failure of
education
• The first reason as to why the policy of state provision may not be effective, is due to
the fact that it is very difficult to measure the size of an externality. Externalities are very
abstract concepts, and abstract concepts can often be very difficult to measure. As a
result, the government will likely have to succumb to making value judgements and
calculated guesses in an attempt to measure the size of the externality, but the chances
of them being accurate are virtually impossible. As a result, it could be further argued
that it is virtually impossible for the government to know how much education to supply
in order to reach the allocatively efficient level. If they supply too little education, then
the education market failure will persist due to underconsumption, and if they supply
too much education, then a new education market failure will arise due to an
overconsumption of education, an over allocation of resources if you will. This will, of
course, limit the effectiveness of state provision as a solution
• The second reason as to why the policy of state provision may not be effective is due to
the potentially high opportunity cost. State provision is extremely expensive, often
costing billions of pounds to start up and maintain. This is money that could have been
spent on other essential services such as health services, transport etc... Possibly, the
government actually funded this through cuts in spending in these areas, and so they
would be creating new problems, potentially recreating market failures in said areas.

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Additionally, if the state provision is paid for through borrowing, the government will
have to pay this back in the future, and they may do this by raising taxes (to increase tax
revenue). This could have unintended consequences on the production and
consumption of other merit goods in the economy. All of this is made worse by the fact
that governments have a tendency to be very wasteful and inefficient, as they do not
have a profit incentive (or have a lack of incentive to not make a loss), thus reducing the
effectiveness of state provision
• The final reason as to why the policy of state provision may not be effective is due to the
shortages it creates. On the earlier diagram, the shaded (red) triangle represented the
amount of excess demand in the economy, highlighting that fact that this state provision
of education is creating a shortage. This is occurring as a result of the government
attempting to provide the good free at the point of consumption, resulting in levels of
demand that are simply not feasible to satisfy. In order to deal with this excess demand,
it will have to be rationed through waiting lists, location, picking at random etc… Any
solutions are likely to reduce the total benefit of the education being provided to people
(e.g. classrooms with too many people), and will likely be heavily dependent upon value
judgements from government officials

JUDGEMENT:
• Balancing both sides of the argument, the effectiveness of state provision as a method
to correct education market failure, by itself, is likely to be low. In many governments’
attempts to provide such services, free at the point of consumption, they simply have
too many people vying for use of the service, either resulting in a reduction in the
quality of the service (meaning that the market failure may not be completely resolved),
or rationing which means that some people will barely get access to the service at all.
Perhaps the most effective solution, would be to have state provision alongside private
sector education. Such a solution would mean that the government would no longer
need to sacrifice the quality of the service they provide, and they could also force those
who can afford to get private schooling to do so by not making them eligible for public
education. There is a tendency in economies for high-income earners to better
appreciate the benefits of education, and so such a solution may be able to correct the
education market failure in the most optimal way

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