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Unformatted text preview: ECON 454, Fall 2007 Department of Economics, University of Maryland Jessica Hennessey Problem Set #3 Answers Question 1 Seven in ten students attending publicly funded universities leave the state after graduation, indicating that a very larger fraction of states&investments in human capital bear fruit elsewhere. Why, then, might states still play such a large role in higher education nancing? If the goal of public provision of higher education is to provide states with a skilled workforce, then states might want to rethink their funding of higher education, given this degree of mobility. Perhaps state universities were established during a time of limited mobility, and the tradition has outlived its original justication. States may also subsidize higher education to o/set individual families&failure to save enough for college or their inability to borrow for college, even though the investment in a college education is cost-e/ective. Thus, the state subsidy corrects this ine ciency or market failure. Another explanation for continued state nancing may be that an educated workforce is not the only rationale for state university funding. Some state universities bring prestige to the state through collegiate sports, for example, and research conducted at state universities can enhance the productivity of industries located in the state, or can lure new industries into the state. In addition, the leading medical facilities in some states serve as teaching hospitals for the state university medical school, and state governments turn to faculty at their universities to provide policy analysis. Thus, universities provide far more services to state residents than just educating their children. Question 2 The town of Greenville has three families, each with one child, and each of which earns $20,000 per year (pre tax). Each family is taxed $4000 per year to nance the public school system in the town, which any family can then freely attend. Education spending is $6000 per student in the public schools. The three families di/er in their preferences for education. Though families A and B both send their children to the public school, family B places a greater value on education than family A. Family C places the greatest relative value on education and sends its child to private school. (a) Graph the budget constraints facing each of the three families and draw a possible indi/erence curve that could correspond to the choice each family makes. The town is considering replacing its current system with a voucher system. Under the new system, each family would receive a $6000 voucher for education, and families would still be able to send their children to the same public school. Since this would be more costly than the current system, they would also raise taxes to $6000 per household to pay for it....
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