Schools and market failures

A short argument for more freedom in education

Schools suffer from an odd problem: they are funded by parents, but students are the ones to consume a school's services. This causes a market failure, as I will explain below. But first, I shall explain the idea of a market failure.

A market failure is any situation in which rational choices made by individuals do not produce optimal outcomes at the level of the group. The term may be confusing because a 'market failure' seems to refer to economic markets, but it doesn't – it can also refer to voting systems or government programmes, as well as other situations that involve group decision-making. A classic example of a market failure is the so-called 'the tragedy of the commons', named after the seminal 1968 paper by Garrett Hardin in which he described a hypothetical situation where a group of herders share a common pasture for grazing their livestock.

In this example, each herder has incentives to maximise their own benefit by adding more animals to the common pasture, as the benefits of additional animals accrue solely to the individual herder. But individual herders do not bear the costs of introducing too many animals; e.g. if the pasture becomes overgrazed, all herders share that cost equally; the original culprit can have the other herders pay for his mistake. As a result, each herder has the incentive to add more animals to the pasture, leading to a situation of overgrazing that ultimately harms all the herders, including the original culprit.

The tragedy of the commons is a market failure because it is rational for individual herders to add more animals to the common pasture: they know that if they don't do so, the other herders are incentivised to. This causes group irrationality because it results in overgrazing, which harms all the herders. The problem would be solved if individual herders had a reason to avoid adding too many animals – e.g. if herders had to pay a fee for introducing additional animals, they'd be disincentivised from overgrazing the pasture. The fee, in turn, could be used to maintain the pasture, leading to an outcome that is preferable to all herders.

Schools suffer from a similar problem: parents influence the services that schools provide by choosing which schools their children attend. But parents are not the consumers of those services; their children are. Hence, schools have incentives to optimise the parents' satisfaction, which is subtly different from optimising their students' education.

For example, parents do not bear the cost of bad teachers; students do. If a teacher does not manage to engage students, or if the teacher does not have his lesson planned out properly, this is not likely to influence the teacher's career because such things are unlikely to affect how happy parents are with the school. Many students must currently be wasting their time in such classes – I certainly did, as shown below.

An example of how I spent my time during boring classes.

Another way in which schools can adversely affect education is by giving students unreasonable amounts of homework, which could cause students to become overworked and give up other activities, like sports or sleep, which in turn affects their school performance. Despite these negative effects, parents may see the large amount of homework as a good thing, believing that more homework is always better. Parents do not bear the cost of their children being overworked; they typically do not know whether their children would benefit from an additional unit of homework instead of an additional unit of leisure, as only their children have enough information to determine that. Hence, we should expect that schools tend to give students more than the ideal amount of homework.

This is similar to me deciding in which house a friend should live without asking for the friend's input: without his input, I won't have the correct information to make an informed decision for my friend, so he should expect to end up in a property that's unideal for him. A school's services are likewise not influenced (much) by students.

One possible solution to this problem would be to allow students more freedom in deciding how they wish to use their time in school. For example, if a teacher is particularly uninteresting, students could be allowed to spend their time on homework in another room. Or homework could be made optional, allowing students to decide which homework best helps them learn those concepts they’re still struggling with. More generally, any other policy that makes schools more accountable to their students would improve education.