2004 Sept Club Good AFR-Education-04!09!20

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Schools: make a 'club good'betterSep 20

Joshua Gans

Last week Mark Latham put school funding on the election agenda. What

was refreshing about this was that he was not afraid to identify losers.Indeed, my household is fortunate enough in life to be one of them. This isa necessary first step to achieving real reform and, as such, it is timely totake a look at what is really at the heart of the economics of all this.

There are many reasons put forward to justify extensive governmentregulation and intervention in the education process. These range from thestandard claim that private choice and provision would lead to insufficienteducation levels to achieve social and economic goals to notions of equityand fairness in access to educational attainment. Such factors clearly

have an impact on policy. But as Stephen King and I argue in our newbook, Finishing the Job, what is unique about education is its "productionprocess".

Put simply, education is not a traditional public good; that is, one that isnon-rival (all can consume it) or non-excludable (it is hard to stop themanyway). While a classroom and teacher can handle a given number ofstudents, this is only up to a point. So education is only partially non-rival.

This stands in contrast to, say, defence, where a significant addition to thepopulation of Australia would not necessarily entail an explosion in ourdefence budget.

In addition, education is excludable. A school can simultaneously provideeducation and deny access to its benefits to anyone. For defence, incontrast, protecting some Australians means protecting them all.

The best description of education's production process is that it is a clubgood. In a classroom, all students (nominally) consume the same product,but that classroom's size can be limited by its membership rules. As such,

it involves similarities to movie theatres, sports stadiums and gyms.

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So how does the

club-good natureof education sitwith extensivegovernment involvement? Why, in a world where students/parents havedifferent preferences over education levels and styles, can't the market

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sort them into schools the way it sorts moviegoers into theatres?

For one, simple equity and efficiency grounds demand that all studentshave access to education. The market will place a price on anything that iscostly to do and, for education, that price may significantly exceed eachhousehold's ability to pay. Moreover, because it is a club, the club will set

its price based on the demands of its members. If you happen to be in anarea where all the schools are costly, you may be out in the cold. For thisreason, a school's fees cannot be the guiding instrument of access, as itwould be for other club goods.

But herein lies a key issue: without fees to moderate access, free-ridingrears its ugly head. So, even if many households want to pay for moreeducational services in their school, there is no means of making thiscompulsory. And there is no mechanism to allow those additional services

to be provided, even if many households want and are willing to pay forthem. Thus, the government faces a conflict: by guaranteeing access itthwarts attempts by school communities to manage schools according tothe preferences of their members.

This same tension drives government policy with regard to health care andhousing. In those cases it deals with it by subsidising low-incomehouseholds to a minimum acceptable level, while letting everyone

consume more if they choose.

The club-good nature of education prevents this same solution. Consider a

direct allowance to all students to ensure they consume the minimumacceptable education level. To be effective, students need to be able touse that allowance to purchase education. However, if their schoolcommunity decides additional fees need to be paid in order to meet theirown educational desires, some students may be left out. Hence, theallowance would need to be combined with restrictions on compulsoryfees, whether it be blanket prohibitions, a minimum number of fee-free

places or designation of some schools in each area that are fee-free.

While the model differs in many countries, Australian states have gone fora policy whereby government-owned schools are fee-free. But with thishas come an additional restriction in terms of standardisation of thoseschools on the basis of a common curriculum. As such, there is little scopeto match school style with diverse preferences.

In a world of clubs, these are very stringent conditions. Why should onlygovernment-owned schools be fee-free? Any private school that agreednot to charge additional fees could surely be a candidate for this. Indeed,

this occurs in the United Kingdom. Moreover, this would open up thepossibility that fee-free schools might choose different educational stylesbased on the preferences of their local community.

Given this, how might we rethink education funding? For starters, it isuseful to remember that our desire for access is at the student level. Soany universal allowance would naturally be tied to a student rather than aschool. Any registered school - public or private - could receive a student'sallowance. This is all one would need to ensure access to minimum

educational standards.

This would also allow another possibility: income testing of allowances. Atthe moment, we achieve this by relying on high-income households to optout of the public system. However, this same outcome could be moredirectly achieved by tying the allowance level to income level. Studentsfrom higher-income households would be associated with a lower

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allowance.

What about the tension between fees and access? After all, if fees exceedthe allowance, access will become an issue. One simple option is ourpresent one of having an "opt-out" rule. Schools whose fees exceed theminimum allowance would lose that allowance completely. Such

toughness would break the trade-off but at the cost of severely restrictingparent/student choice.

A softer approach would be to tie the allowance to the fee policy of

schools. A school with no additional fees or with a certain number of fee-free places could receive the full allowance, while those with fees wouldreceive a reduced allowance. This would effectively amount to a tax on theimprovements a school may wish to put in place but, compared with thesystem now, at least schools would have that option.

Surely, if education funding is back on the agenda, it is worth being

innovative and rethinking all our current preconceptions.

q Joshua Gans is professor of management (information economics) atthe Melbourne Business School, University of Melbourne. Finishing theJob: Real World Policy Solutions in Housing, Health, Education andTransport is published by Melbourne University Publishing.

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