Robert Jensen, Economist at UPenn, went to the DR and talked with kids about what they thought the expected returns of schooling for secondary school was. People thought that the return was much lower than what was statistically true, and they also thought they would make more money with a primary school education than they would in reality. They overestimated the value of primary school and greatly underestimated the value of secondary, and some university education. This shows that there was a misconception in the Dominican Republic about the value continuing education has.Review Sheet, Midterm 2, Spring 2014, EC 340When are subsidies justified on economic efficiency grounds and at what levels of the system and for what kinds of services? The importance of externalities and market failuresfor this question. What is the empirical evidence related to this questionShould finance be private or public? What is the economic justification for public subsidies? If there are no public subsidies, then there will be no public expenditure. Everyone will pay the full marking cost of their kid going to school. It is hard to think of a legit economic reason of subsidies for public schools (on equity grounds yes) the reason is simple, the benefits of schooling are private, higher income with higher schooling. Since benefits are private, why dopeople need subsidies for public schools.Market Failures: Credit Market Constraints- A household may not be able to borrow as much as they want at the market interest rate, nor will they be able to borrow against future income. They are more likely to be an issue for the poor (since they do not have enough assets to borrow against to get loans). The argument is that the return to schooling is higher than the market free interest rate (risk free market interest rate), so the net present value of schooling is positive. Any investment where the rate of return is higher than the RFMR should be made, but it is not always. But there is a reason for a subsidy not to everyone, but a targeted subsidy to people who would be facing credit market constraints, the poor. Example of this was Progressa (Oportunidades) in Mexico. Bob Lucas argues another reason for public subsidy. He said that a better-educated work force leads to higher levels of technological progress, which raises economic growth rates. This represents an externality, because anyone family making a decision about the schooling of their child will not account for this. This is reason for a public subsidy; this one can be a general one (there is very little evidence on this point). Overvalued exchange rates as a form of taxation of farmers-Exchange rates are currently determined by supply and demand but in the 60-90’s a lot ofdeveloping countries used fixed exchange rates. So it would be fixed in a currency that is not of its own country. When this happened there would be both fixed rates and than parallel markets. When the fixed exchange rate is overvalued. Indirect tax represents the difference in the fixed rate and the rate in the parallel markets, and this shows that the fixed rate is overvalued that amounts to this tax. If we had floating exchange rates this does not occur. The villains are not large corporations but rather international governments that do not allow these farmers to sell their products at the international price level. Indirect taxation on agriculture= When the exchange rate is overvalued. You have a fixed exchange rate rather than a floating rate. The domestic currency value of the dollar is too low compared to the market exchange rate. Exportersget less local currency; this amounts to a tax. The market and nonmarket returns to schooling-Bob Lucas argued that a better-educated workforce leads to higher levels of technologicalprogress, which raises economic growth rates. This represents an externality, but there is very little evidence supporting this. Higher Wages vs. Better Health for Example.Allocative efficiency impacts of parental schooling on child schooling and child health-Technical Efficiency- Is when you get maximum outputs given your input use. It means you are on the production function. In marginal value of products is equal to input prices= allocative efficacy. It means you are allocating your input prices according to your utility maximizing conditions. Marginal value of product equals input price, assuming you are in a competitive market. Costs of schooling: foregone income and cash costs and how they vary by level of schoolingOne of the distractions for child enrollment in schools is work: In Bangladesh 7-9 y/o’s work 5 hours a day; 10-12 y/o’s work 7 hours a day and 13-15 y/o’s work 9.5 hours a day. Despite the fact that income is higher in the future for families that send their children to school, many families forgo that income if they force their kids to work instead of attending class. Working rises with age, due to older kids getting paid more to work. Determinant and consequences of enrollments: higher wage means more of an opportunity cost to go to school. Expected Wage Differential: The additional income expected to between going to school and not.The higher this differential is, we should expect to see more enrollment.Private and social rates of return to schooling: how they are computed and what they meanSubsidies to secondary and tertiary schooling are increasingly important. Since more wealthy children are going to tertiary schools, subsidies to universities are usually taken up by the wealthy. Primary school subsidies are taken up by many children independent on their economic level. Private returns are higher than public returns because public schools net out subsidies. Returns to primary schools are generally higher than returns to secondary or university. Very important implication on public policy: on a maximizing view, you allocate your resources on those schools with the highest rates of social return. You want your return to be higher than the market free interest rate. Therefore, governments ought to be investing first in primary schools, only later in secondary and higher education. (wasn’t realized until 1980’s)Concave Returns- schooling on the x-axis, and returns on the y-axis. Return rates decrease with more schooling. Convex Returns- Returns that increase with more schooling. Be able to compute net present value of an investment if you are given benefits, costs and a risk-free market interest rate- Computing Net Present