Econ Assessment - Report Example

& No Economics and Externalities (Report) 07 December Introduction With todays growing trend towards globalisation in trade and commerce, capitalism is seen as the way to go forward for most countries. One of the most cherished principles in the tool box of economics theories is the concept of a free exchange in which free markets set the value of an exchange in goods or services between seller and buyer. This means there is an all free exchange of available information between two parties to conclude transactions in terms of a price between a willing seller and a willing buyer. This concept or theory assumes a free market that is really efficient in which the voluntary exchange is mutually beneficial in terms of the value agreed upon between these two parties based on freely-available information. However, a truly efficient market is only in theory because no matter how people will try to be efficient, there will always be distortions in a capitalist market. The distortions can be the lack of adequate or timely information, resulting in less than optimal distribution of the goods and services produced within a certain economy. The sub-optimal distribution results in what we call as an externality to the two-party transaction that involves other third parties not included specifically in that transaction between a seller and a buyer. As used in economics theory, externalities refer to the so-called transaction spill-over effect in which the actual costs or benefits of a product or service are not fully transmitted in the prices. In other words, the actual price being agreed upon between seller and buyer is not the actual cost of production because of market inefficiencies or there might be unintended benefits to third parties other than the buyer. Externalities can even cause significant social problems if not at all examined, checked and corrected immediately (Hunt, 2002, p. 397). Discussion Externalities are defined by economists as the unintended result in terms of benefits or costs to other third parties. This means some people will end up carrying the burden of costs although they are not a party to the transaction (spill-over effects) or conversely, a third party will benefit somehow although he or she is not the buyer of a particular product or service. There are many examples of externalities in capitalist societies because externalities are one form of the so-called market failures which in turn results when the allocation of goods and services in a free market is not totally efficient. A free capitalist market is supposed to be self- regulating in which the best interests of everyone is served under Adam Smiths “Theory of an Invisible Hand” which posits self-interest, constructive competition and the law of supply and demand will allocate the resources of an economy in the most efficient manner possible. Although there are many other signs of a market failure such as monopolies and public good, this paper will focus its discussions on externalities with regards to Australian education with some concepts related to it also discussed such as the Pareto Effect and also on the role of welfare economics in how externalities are viewed by most people, economists included. In a few instances, a non-competitive market results from a market failure that may even require government intervention although economists are also divided on whether this intervention is good or bad in terms of policy decisions and intended market corrections. There are several examples of such government interventions in the form of taxes, the regulations imposed on a particular industry, bailouts, dole outs, minimum wage laws, price controls and especially the sensitive issue of subsidies. In this paper, the way the Australian government subsidises higher education for its citizens is examined in relation to the on-going debates in Great Britain facing a similar issue. The core of the matter is the question of how its foreign students are required to pay the full fees while its citizen-students are subsidised. Australian Education System – among the thirty major developed countries belonging to the Organisation for Economic Co-operation and Development (OECD), Australia has the highest literacy rate due to its universal system of compulsory education. Its high academic standards are what attract many foreign students to take their college degrees in Australia. In fact, Australia has one of the highest ratios of international-to-local students in the world. Its educational system is mostly funded by government grants and subsidies but this privilege is restricted to Australian citizens only. However, globalisation trends now point to decreasing the government’s burden in providing this public service similar to public health care today. In other words, most governments of the world pressured by the financial crisis which also brought in reduced tax revenues and big fiscal or budget deficits are now looking for other ways to lessen this burden on public finances. Similar to the globalisation in health care which views it as a traded commodity, the provision of universal education as a public enterprise is slowly giving way to the concepts of cost-recovery and cost-sharing schemes. In short, most government policy makers are of the opinion that education should become a competitive market as well in which there is full cost recovery by reducing government subsidies (Tomasevski, 2005, p. 3) as much as possible. It is the same tack taken by the new Conservative Party in Great Britain today in which it has a pending bill to cut teaching subsidies in the arts, social sciences and humanities subjects in its universities (Slade, 2010, p. 1). This new party in power inherited a slew of problems from the previous government but it is primarily one of deficits caused by the financial crisis. It has hit Great Britain quite severely and there is certain urgency to these subsidy cuts in order to help reduce the yawning budget gap. All the costs resulting from the cut in subsidies will be borne by the students but some critics charge the funding cuts were applied unevenly because engineering, mathematics and the sciences did not suffer any funding cuts. The debate there in England has relevance to Australia because of some similarities in their educational systems. The Australian educational system has been based ever since on the government’s full responsibility of providing education which is funded by the federal government but managed by the individual states (Graetz & McAllister, 1994, p. 170). However, economy of Australia has been spared the worst of the economic crisis and is now even on its way to a semblance of recovery; there are implications of cutting these subsidies as a way to prepare it for any future contingencies as well. But beyond the issue of which subsidies to what subjects will remain is the ethical and moral issue of subsidising Australian education for native students only. What attracts many international students to Australia, besides its good academic standards, is the chance to learn English and this is why many students come from Indonesia, South Korea, Malaysia and Japan. Australia does not subsidise foreign students and so it is spared the big question of moral hazard (some students who will fail but still feel no financial regrets or its consequences because they did not spend much for their college education). Further highlighting the importance of higher education as precious foreign exchange earner, Australia had the highest earnings from foreign students in 2001 with $2.145 billion in revenues (compared with only $727 million for Canada and $353 for New Zealand). Australia also had the highest level of such export earnings as a percentage of its service exports which was 13.1% compared to Canada’s 2.0% and New Zealand’s 8.1% (Guruz, 2008, p. 143). Most of these foreign students going to Australia are likewise attracted by its incentives to join the workforce after graduation in the host country and the possibility of getting its citizenship. A number one criterion for foreign students to be admitted to Australian schools is their ability to pay their full tuition costs, in addition to certain social and language requirements including also the capacity of the university or college to accept foreign students based on the available space in their classrooms (Veltman, 2000, p. 82). Australia does not face the same dilemma as Great Britain when it comes to foreign student policies because after a thorough review, it had decided to lift all quotas on foreign students, limited only by space availability on campus. Pareto Effect – sometimes termed as the Pareto Efficiency or Optimality, this concept is in operation in the case of the Australian market for university education. Australia decided early on to admit foreign students only if they pay the full tuition fees and so avoid the issue of subsidising students who are not its citizens. The foreign students choose Australia mainly to learn the English language in an English mother-tongue country (includes England, USA, Ireland, Canada and New Zealand). When foreign students are asked to pay full tuition, there is in operation Pareto Efficiency in which one individual becomes better off without making another individual worse off in the context of education economics. This means all Australian native students benefit fully from the government’s education subsidy because these are not shared with the foreign students. This is their inherent rights as Australian citizens to deserve all the social and educational benefits the Australian government can provide them. On the other hand, foreign students are not made worse off by this policy of Australian government as the foreign students who wish to study in Australia are expected to be rich or at least well-off in their native countries. It is therefore only fair that they pay their fees in full and not expect the Australian government to be spending for their tertiary education. This is an economic view of education which does not take into account the other social or political implications of this policy. What it amounts to is just a more efficient allocation of scarce or limited government resources to its own citizens instead of to citizens of another country. It may be discriminatory in a sense but this is the right of the government and its citizens on how it best sees a proper allocation of its tax revenues for the benefit of its citizens. No one can question a country on this political prerogative as it is the inherent right of a state. There are an estimated 240,000 foreign students in Australian universities representing some 20% of the entire Australian student population (Bowen, 2008, p. 1). The Australian government and its people benefit from the revenues generated by foreign students while not expanding its subsidies while the foreign students are not worse off because they can afford to pay anyway. Welfare Economics – this sub-topic of economics needs a little discussion within the context of the British decision to cut subsidies to certain subjects in its universities because it contains externalities which is the topic of this paper. This subject has externalities in it but a main difficulty of how to properly value subsidies in the educational system of most countries is what values to assign during the cost-benefit analysis (Ackerman, 1997, p. 121) because the issue is hard to quantify in real meaningful terms. Externalities present the classic view that maximizing individual welfare does not always result into any maximum social welfare. If the government continues to subsidise education, the benefits are not spread very evenly, which in the case of Great Britain, has been seen by most critics as counterproductive. This is because arts, social sciences and humanities contributed the most to its gross domestic product (7.3%) and also in absolute terms as an export commodity to the tune of £9 billion (Slade, 2010, p.1). It had chosen to cut subsidies to the subjects that contribute a lot to the economy while in the case of engineering, sciences and mathematics the subsidies were left intact when the people with these degrees often cannot find jobs and therefore do not contribute to the economy. Any decision to implement the planned subsidy cuts will weaken the British economy as it embarks on the global knowledge economy today because the arts, social sciences and humanities are subjects that in turn generate ideas, diffuse knowledge, inspire creativity and in general, catalyse innovations. The logic behind this move may seem counter-intuitive at first glance but Great Britain can follow Australia’s example by marketing its strengths on social sciences as an attraction for foreign students to enrol in British universities but pay in full their tuition fees. This will generate additional revenues for tertiary educational institutions and reduce their need for government subsidies and at the same time widen their sources of revenues for this sub-sector of the service economy. What British universities need to do now to offset the loss of subsidies is to market themselves aggressively through what is called as “institutional international branding” to attract full-paying foreign students (Guruz, ibid.). Conclusion Although subsidies are well-intentioned governmental interventions, it is inevitable it will create distortions in the market for education. Great Britain is under pressure to reduce its budget deficit which currently stands at about 12% of its GDP (Mayer, 2010, p. 28). There is another difference between Great Britain and Australia which is acute labour shortage being experienced in Australia today (the reason foreign students are encouraged to stay and apply for jobs when they graduate). The newspaper article by Slade mentioned reducing its rates of immigration from 196,000 annually to mere tens of thousands, with reductions coming mostly from foreign students. In this regard, Britain has to be highly selective when admitting foreign students, unlike before. Great Britain today is already the second-most populous country in Europe (after the Netherlands) in terms of population density (MigrationWatch UK, 2009:1). Australia is not suffering the problems of Britain (high unemployment, subsidies to its foreign students and alarmingly huge budget deficits) and can therefore afford to stick with its policy of admitting foreign students on the condition they pay in full their tuition fees. This is the best approach as it does not create distortions or externalities which are often hard to undo as we have seen in Great Britain today. Overseas students in Australia know full well they are to pay full tuition before leaving their home country and Britain suggested a similar strategic response. The trickle-down or knock-on effects of subsidies in welfare economics is very hard to quantify (when making money-value estimates) and it is far better for Australia to continue with its free market approach to offering university education to all comers and takers who are financially capable of paying full tuition fees. The severity of the cuts in Great Britain will not happen in Australia as its economy is starting to recover with inflation looming and so a need to raise interest rates (Richardson, 2010, p. 1). In Australia, its educational subsidies are used as a redistributive social policy and worked based on economic theory (Gormley, 1991, p. 79). Figure 1: Market Failure and Externalities (Source: http://tutor2u.net): Example only Reference List Ackerman, F. (1997). Human Well-being and Economic Goals. Washington, D.C.: Island Press. Bowen, C. (2008, August 13). Foreign Students Gain Automatic Work Rights in Australia. Ministry for Immigration and Citizenship. Retrieved from http://www.minister.immi.gov.au/media/media-releases/2008/ce08038.htm Gormley, W. T. (1991). Privatisation and its Alternatives. Madison, WI, USA: The University of Wisconsin Press. Graetz, B. & McAllister, I. (1994). Dimensions of Australian Society. South Yarra, Victoria, Australia: Macmillan Publishers Australia Pty. Ltd. Guruz, K. (2008). Higher Education and International Student Mobility in the Global Knowledge Economy. Albany, NY, USA: SUNY Press. Hunt, E. K. (2002). History of Economic Thought: A Critical Perspective. New York, NY, USA: M. E. Sharpe, Inc. Mayer, C. (2010, April 26). Profile: A Question of Character. Time, 175 (16), 27-29. Migration Watch UK (2009). Decade of Immigration Means ½ Million More School Places to be Found in Next Five Years – and 1 Million over Ten Years. Retrieved from http://www.migrationwatchuk.com/http://www.migrationwatchuk.com/ Richardson, C. (2010, November 11). Inflation to Surge, with Interest. Business Review Weekly. Retrieved from http://www.brw.com.au/p/sections/eco/inflation_to_surge_with_interest_JLwEvA7j2EYfpgaTGf4h7J Slade, C. (2010, November 24). No Art to Savage British Cuts. The Australian, p. 1. Retrieved from http://www.theaustralian.com.au/higher-education/opinion-analysis/no-art-to-savage-british-cuts/story-e6frgcko-1225959637059 Tomasevski, K. (Winter 2005). Globalizing What: Education as a Human Right or as a Traded Service? Indiana Journal of Global Legal Studies, 12 (1), 1078. Veltman, L. (2000). Living & Working in Australia: Everything You Need to Know for Building a New Life. Oxford, UK: How to Books, Ltd. Read More