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Intervention in Education Market
Intervention in Education Market
43391796
romi-bhakti.hartarto@students.mq.edu.au
Public Finance Intervention in Education Market: Study Case of
Indonesia
This essay aims at analyzing the rationale for public sector intervention in
the economy by empashizing the theories that constitute why and when the
public sector intervention is necessary. By giving a relevant example in education
market, this essay will concentrate in providing economic framework through
market failure rationale. This essay will be divided into three main parts. The first
part discusses the market failure as the main reason of public intervention. The
next session focuses on the role of government in education market through
providing student loan. And the last one will evaluate the recent development of
higher education financing in Indonesia.
One prevalent theory that asserts the rationale for governmental
involvement in the private market is public interest theory. This theory suggests
that the government doing so in order to achieve economic efficiency and social
equity. Economic efficiency refers to situation in which there is no waste of
resources in the production and allocation process. When market can not deliver
efficient allocation of resources due to the presence of market imperfection,
market failure ensues. Market failure is generally caused by two main factors:
public goods and externalities.
Economists define public goods as satisfying two criteria: non-rival and
non-excludable. Non-rival implies that consumption of one person does not
diminish anybody else. Meanwhile, non-excludable means that it is not possible
to exclude anyone from consuming the good. Street lighting is such an explicit
case because once consumer enjoys the service then anyone else can freely
consume that good. The government will provide this service since it is
impossible for private company to coerce everyone to pay for a good that is nonrival and non-excludable. Provision of street lighting by private company will lead
to inefficiency. What about education?
Education seems satisfying none of the above criteria as a public good. It
is excludable for which a certain child can be excluded from any educational
opportunity. And it is rivalry in the case that if some children get any particular
attention from the teacher, then other children will obtain less benefit from that
teacher. Hence, it is necessary for the government to intervene in education
market by mitigating this access inequality. Eventhough education is not
considered as a public good in this sense, Tooley (2013) argues that it seems to
have externalities.
Economists define externalities as a cost or benefit applying to other
parties which is not directly involved in economic transaction. This in turn will
lead to inefficient quantity of the good or service delivered by the market since
the buyer and seller ignore this external cost and benefit. Hence, externalities
will give incentives for the buyer and seller to maximize their utility to over- or
under- production of the commodity based on the standpoint of society. Goods
with positive externalities exist whenever parties not involved in the transaction
receive the benefit. Since the benefit is not accrued to private transaction, those