Lecture 5: Education

Question 1

The Human Capital

Answer 1

Stock of skills and knowledge embedded in individuals
Is subject to obsolesce, it has to be accumulated and is not transferable
Wage: determines the return on investment in human capital, given the cost incurred in acquiring it
Main channel to acquire human capital: education

Question 2

The choice of level of education

Answer 2

Marginal Benefit: Decreasing marginal productivity of human Capital
Marginal Cost: Increasing marginal cost of acquiting human Capital

Question 3

Market failure and Public intervention

Answer 3

Even if education is not a pure public good (It is excludable and partially rival), it may be subject to market failures
Three main sources of market failures in education:
A. Income constraints:
For a given level of ability/skill (marginal benefit), individuals coming from families with different levels of income may face different marginal costs of acquiring education
B. Positive externalities: From highly educated population
Knowledge, skills and productivity acquired via education are important for the overall productivity of a country
Socialization function: Education helps creating the “social capital” of a country
Custodial function: Education has a role in taking care of children and thus allowing parents to work. Important effects on labour supply and labour market
C. Asymmetric information: It is difficult for an individual to assess the quality of an education institution