Positive Externalities in Higher Education


The identification and measurement of public and private goods in higher education, presents challenges for government agencies and private suppliers to overcome the free rider problem and encourage positive externalities. To analyse the extent of market failure and consider the costs of not accounting for the non-market private and social benefits, to prevent poor investment and policy decisions. Covering the pitfalls associated with bureaucratic subsidised higher education, and the freedom associated with market competition. Conversely, societal pressures prevent free riders through moral injunction and higher education substitutes left to the individual can prevent associated pitfalls.

A “positive externality: the unintended benefit enjoyed by a third party to an exchange.” (Heyne, Boettke, and Prychitko, 2014) For instance, A pays for a university degree, B provides education, as an unintended consequence C benefits from improved overall literacy. “Highly skilled people [volunteer, and] see themselves as actors rather than as objects of political processes.” (Organisation for Economic Co-operation and Development [OECD], 2013) Where private goods associate with graduate earnings and income differentials, public goods associate with social equity, civic engagement, and internationalisation. As shown in figure three, as optimal quantity exceeds equilibrium quantity, it results in market inefficiency.

Figure three Education and the Social Optimum


Source: (Mankiw, 2015).

“Extension of property rights [and regulation] may effectively internalize [externalities]” (Cheung, 1973). Government agencies can use command-and-control policies that regulate behaviour directly or market-based policies to provide private suppliers incentives to act. Governments often use a subsidization policy to increase consumption. (Azam, n.d.) When appropriating funds an ideal corrective subsidy should equal the external benefit and consider quantity and quality. John Dewey suggests the growth should be one where the learner progresses to become a better citizen. (Fairfield, 2009) In economic theory, values are subjective cannot be measureable; therefore the social value is often compared to the opportunity cost, represented as consumers’ willingness to pay minus the actual payment. As free goods have no price signals distribution of resources results in the socialist calculation problem.

Where property rights are not clear or imposed, a positive externality results in the free rider problem, allowing individuals to avoid associated marginal costs. For instance, A creates theorem which B uses without charge. “According to the Coase theorem, if private parties can bargain over the allocation of resources at no cost, then the private market will always solve the problem of externalities and allocate resources efficiently.” (Mankiw, 2015) This can be best understood from the classical parable called the Tragedy of the Commons “that illustrates why common resources are used more than is desirable from the standpoint of society as a whole.” (Mankiw, 2015) Private markets overuse the resource, while governments regulate behaviour and impose fees to combat overuse. Technology property rights, such as patents and assigned contracts between parties, lower transaction costs and encourage entrepreneurial incentives. (Katz, 1992) Equally, private suppliers would devote few resources with high transaction costs and absent public policy. However, discourages innovative behaviour through restrictive regulation. It can be argued, “[Melbourne Institute of Technology] provides free access to its courseware on the Internet, without impairing the private value of an enrolled MIT degree, which provides more than knowledge.” (Marginson, 2012) Determining the goods’ beneficiaries, can exclude free riders. As a private good, [scarce places in elite university programs], internalise the benefits providing private suppliers proper incentives. (Frischmann and Lemley, 2007) Free markets have a fair process allocates goods to the consumers’ willingness to pay.

The private benefit from higher education as shown in figure two where income grows with the level of education achieved, can also be a variable. “Interestingly, the federal tax structure reaps a rich harvest from the additional incomes (internal benefits) accruing to individuals, by taking an average of probably 25 percent of the additional income generated by more schooling.” (Hansen, 1974) This defeats the purpose of correcting the external benefit and taxing both society and students. This income tax deduction on student workers then goes back to charitable donations, including higher education, while subsidy resources must be taken coercively from tax payers to bear the cost and compensate the student’s costs. Corporate planner’s cost-benefit-analysis shows a level of ignorance and basis, with limited resources, special interests, and increasing competition, faced with allocating resources when there are goods without market prices.

Figure two Private Benefit of Higher Education


Source: (Kena, et. al. 2014).

“Once an institution is hooked on federal financing, it’s virtually impossible to stop bureaucratic regulations and mandates that routinely follow subsidies.” (Paul, 2011) Where declining appropriations are accused for tuition increases, today’s purpose of education demined by the student’s upkeep of good grades and the professor’s upkeep of research and publication to achieve this monetary grant. However, there is no direct correlation between funding and improved higher education. For example, higher education in Finland is free and public, as free goods have no price signals, however, in the long term causes crowded classrooms and oversupply of teachers.

The private market can also donate, “colleges and universities receive gifts from alumni, corporations, and foundations in part because education has positive externalities for society.” (Mankiw, 2015) “The Canadian case is somewhat unique in that there is no federal ministry or agency in charge of education, unlike in other federal countries.” (Capano, 2014) Higher education considered as a normal good, with a positive income elasticity. Students investing huge amounts toward a degree know that the World International Rankings of the institution is a key consideration. However, the race to the top is an act of continuous investment at the government level to compete internationally. “The Commission distinguished between prices and costs, and found that prices (what students pay) had been increasing faster than inflation in both the public and private not-for-profit sectors.” (National Center for Education Statistics [NCES], 2003) Subsidies are increasing the total cost of a degree for the student overall additional to government student loan interest. Little do students realise this side effect when weighting up the costs and benefits. Presently, in New South Wales lies a present gap in the higher education market, where Permanent Resident Visa holders are ineligible for government student loans for non bridging courses, forcing them to pay the overvalued cost upfront where many students have not got sufficient funds to compete. To overcome this subsidy propaganda, there needs to be a balance between liberties with the “[competing] governmental interests.” (Kuznicki, 2014) The market could be left to compete on having the lowest price and better quality.

In conclusion, the identification and measurement of public and private goods in higher education, continues to prevent an ideal corrective subsidy that equal’s the external benefit. Considering market failure for government agencies and private suppliers to overcome the free rider problem and encourage positive externalities through government market-based policies. Arguing that the abolishment of subsidies and the promotion of market based competition can lower the overall cost to the student and society taxes.

Reference List (American Psychological Association)

Azam, S. (n.d.). Explain why the market might under-produce a good which generates a positive externality. What might be appropriate policy interventions?. Norwich Economic Papers. University of East Anglia. Retrieved [20/03/15] from <https://www.uea.ac.uk/documents/953219/967353/Azam_S+Policy+interventions.pdf/4e9ba683-91a5-4cd9-9644-10024e4d0001>.

Capano, G. (2014). Federal dynamics of changing governance arrangements in education: A comparative perspective on australia, canada and germany. Journal of Comparative Policy Analysis: Research and Practice. 1-20. doi:10.1080/13876988.2014.952530

Cheung, S. (1973). The fable of the bees an economic Investigation, Journal of Law and Economics. 16(1). ISSN: 0022-2186. University of Chicago Press.

Fairfield, P. (2009). Education after dewey. New York; London: Continuum International Pub. Group.

Frischmann, B.M. & Lemley, M.A. (2007). Spillovers. Columbia Law Review, Columbia University School of Law. 107(1). ISSN: 0010-1958.

Hansen, W. L. (1974). Needed research on external benefits of higher education. Comparative Education Review, 18(1), 1-5. doi:10.1086/445750

Heyne, P., Boettke, P., & Prychitko, D. (2014). The economic way of thinking, 13th international ed. Essex, England: Pearson Education Limited.

Katz, M.L. (1992). Product introduction with network externalities. The Journal of Industrial Economics. Blackwell Publishing Ltd. 40(1).

Kena, G. et. al. (2014). The Condition of Education 2014 (NCES 2014-083). U.S. Department of Education, National Center for Education Statistics. Washington, DC. Retrieved [29/04/15] from <http://nces.ed.gov/pubsearch/pubsinfo.asp?pubid=2014083>.

Kuznicki, J. (2014). Socialist calculation debate: In search of a planned society Cato Institute.

Mankiw, G. (2015). Principles of economics, 7th ed. United States: Cengage Learning.

Marginson, S. (2012). The problem of public good(s) in higher education. 41st Australian Conference of Economists. (July). Melbourne. Retrieved [21/03/15] from <http://www.cshe.unimelb.edu.au/people/marginson_docs/ACE2012_8-12%20July2012.pdf>.

NCES. (2003). Congressionally Mandated Studies of College Costs and Prices. U.S. Department of Education, Institute of Education Sciences. Retrieved [29/04/15] from <



OECD. (2013). PISA 2012 results: ready to learn: students’ engagement, drive and self-beliefs. PISA Publishing. 3(). (December). Retrieved [21/03/15] from <https://books.google.com.au/books?id=ZhBGAgAAQBAJ&dq>.

Paul, R. (2011) Liberty Defined: 50 Essential Issues That Affect Our Freedom. Grand Central Publishing. Retrieved [28/04/15] from <http://www.libertarianismo.org/livros/ronpaulldefined.pdf>.


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