Market Theory of Schooling

Under certain well-defined conditions, markets in which buyers and sellers meet to exchange goods and services are able to produce efficient results. However, most national governments all over the world exercised great care not to rely on markets to produce and distribute educational services, particularly at the K–12 level. The logic behind this mistrust of market forces is grounded on the assumption that markets experience imperfections in producing and distributing some goods and services. These goods and services are called public goods in the field of public administration. Governments must intervene in such markets to produce socially efficient results.

Public goods theory uses five criteria for the evaluation of market efficiency for education and justification of government intervention. These five conditions must be met for a private sector of the economy—the market—to function efficiently. Indeed, these conditions are essential if the private sector is to perform in the public interest. These conditions are (1) perfect information about what is available, at what price throughout the economy, (2) all goods and services produced, as well as productive inputs, must be perfectly mobile, (3) there should be no market domination by either producers, consumers, or third parties of any sort, (4) there should be no jointness in supply, and finally (5) there should be no externalities.

Evaluation of education markets indicates that it is possible for them to operate, but at the same time it may lead systematically to socially inefficient results, particularly for basic education. For instance, mobility can be a serious problem in educational markets. A parent might be knowledgeable about a program well suited for his or her child but be stymied by the distance between the school and the home. Mobility problems occur in many other markets only once, at the time of purchase. On the other hand, in education markets, there is a recurring problem, and it can seriously undermine the efficiency of market solutions. To some degree, education is a jointly supplied service. When two students sit in a lecture hall, the fact that one student listens to the instructor does not preclude the other students from listening simultaneously. However, this interpretation may be oversimplistic, and at the price level, to which education is jointly supplied, it remains ambiguous. Jointness at least poses significant resource allocation issues because it becomes difficult to measure the flow of resources to individuals when it is unclear what conditions educational resources are in joint supply.

There has been a widespread agreement that the external effects of education are the main reason for both the justification of education as a public service and a failure of the market. In addition to private benefits to students, education benefits parents and society in general. External benefits are important for two reasons. First, from an equity point of view, if costs of private or public services are to be borne by those who benefit from them, then those who receive external benefits should contribute to the financing of education. Second, an optimal level of educational expenditure will result only if omitted; too little education will be consumed from an economic efficiency perspective. Despite these arguments, private production and distribution of education always found strong supporters in theory as well as in practice. For instance, 11% of K–12 students are educated in private schools. The supporters of private delivery of education claim that efficiency and choice, two of the three main principles of American education, are sacrificed to achieve equality. Supporters of private delivery of educational services argue that government monopoly in K–12 produces inefficiencies, while a competitive education market place would produce much greater upward pressures on quality and downward pressures on price. Similarly, satisfaction and choice by parents and the efficiency of schools have increased in competitive markets. The goals of competitive efficiency and educational freedom are inseparable.

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