(2015) A Level H2 Econs Paper 2 Essay Q1

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1. Prospective students and governments each make decisions that affect the scarce resources that are devoted to university education.

(a) Explain the determinants of a rational prospective student’s decision on whether to participate in university education. [10]

Introduction

A rational prospective student would consider expected costs vs expected benefits in deciding whether to participate in university education. He/she will also have to consider the opportunity costs of participating in university education.

Expected Benefits

1. One of the key determinants of a rational prospective student’s decision on whether to participate in university education will be the expected benefits of receiving university education

2. Expected benefits of receiving university education would be the potential future earnings from a job after completing university education

3. These benefits can differ depending on the university & course e.g. recent surveys show median salaries for computing graduates receive salaries of upwards of S$5000/monthly while those in music report a median salary of S$3100/monthly

4. In this instance, as seen in Figure 1 below, the marginal private benefits (MPB) represents the benefit from consuming an additional unit of university education

Expected Costs

1. One of the key determinants of a rational prospective student’s decision on whether to participate in university education will be the expected costs of receiving university education

2. Expected costs of receiving university education can include, among other things, tuition fees across 3-4 years, cost of textbooks & materials, accommodation costs (if living abroad) & funding overseas exchange programmes (if any)

3. This can possibly cost anywhere between S$20,000 to S$100,000 per year of schooling

4. In this instance, the marginal private costs (MPC) in Figure 1 represents the cost from consuming an additional unit of university education.

5. Beyond the explicit monetary costs of university education, there’s also the opportunity cost of university education to consider.

6. A prospective student can spend the 3-4 years he/she would have otherwise spent studying, taking up a job and receiving earnings in the 3-4 years and also potentially obtain a headstart in his/her career with the additional 3-4 years. This loss of potential earnings are the opportunity costs associated with participating in university education

Conclusion

1. The quantity of university education consumed will be at where Qm where MPC = MPB

2. Alternatively, a rational prospective university student will participate in university education as long as total expected benefits exceed the total expected cost.
   

(b) Discuss the factors that governments should consider in allocating resources to university education. [15]

Positive Externalities

1. Positive externalities are generated in the consumption of education

2. When individuals consume education, they consider their MPC and MPB and consume at Qm where MPC = MPB

3. This fails to consider the positive externalities / external benefits (MEB) generated in the consumption of education

4. External benefits from university education can include knowledge being shared from research papers written, prospective employers who can benefit from the knowledge / expertise, general benefits to the economy from a better educated workforce

5. These benefits are not accounted for by individuals in the consumption decision, thus governments should consider the extent/size of external benefits in deciding the amount of resources to allocate towards university education

Information Failure

1. The government should also consider the extent of imperfect information in parents / prospective students in understanding the true extent of expected benefits from receiving university education

2. Resources can be dedicated towards publishing commission surveys on the employability of graduates from different university courses

3. In addition, the government should also consider whether the government itself suffers from information failure in whether it is able to correctly estimate the extent of MEB that exists, to correctly derive an appropriate amount of resources to dedicate / subsidise for university education. An incorrect assumption may lead to overconsumption of university education which can lead to an excess amount of university graduates with insufficient jobs for them to take up.

Opportunity Costs of Government Expenditure on University Education

1. University education can be very costly to subsidise, typically billions of dollars in a year

2. The government needs to consider the opportunity costs of spending on university education, in other words, consider whether alternative spending causes such as spending on healthcare, food security, defence or transfer payments may be yield better social outcomes than on university education

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