market failure of education


by Samarth Agarwal


One cannot deny the fact that a large number of economists have been tempted to study the field of education from an economic angle and have made efforts to apply economic reasons to educational issues. With evident corollaries for both, the regulation of higher education systems and the administrative mechanisms of Higher Education Institutions, one can easily deduce the proliferating role played by the Markets or market-like mediums in higher education. Since the market is notably the foundation of all economic concepts or the structure in which they work in economics, it is not very hard to imagine that economists have tried to apply the market framework to several systems including the higher education system. The findings of several great economists have resulted in shaping the view of modern-day economists regarding education and the nuances in the application of economic principles to educational issues.

In the field of higher education, there may be found different market situations from State monopoly to competitive markets. Therefore, the markets of higher education can be better termed as quasi-markets as they are not perfectly competitive markets. Since markets for higher education is a form of market, it is prone to several characteristics of a market which also includes the problem of Market Failure. It is imperative to note that failure of the market doesn’t mean the market has stopped working but it rather means that it has lost its efficiency. It is primarily the inability of a system of markets to provide certain goods either at all or at the most desirable or ‘optimal’ level”. This article discusses market failure in the field of Higher education and suggests necessary solutions to rectify this failure.

The market is not always absolutely successful and is prone to certain failures as talked about in the above paragraph. Over the years, several economists have attempted to address the problem of market failure. The concept of market failure was originally presented by economists as a normative explanation of why the need for government expenditures might arise. It has been said that the solutions to market failure can be provided through markets, hierarchy, and networks. It is imperative to note that fixing the market doesn’t simply mean levelling the demand and supply. While some economists consider government intervention to be the only resort to fix the failure in the higher-education market, others believe that market failure can be corrected without the intervention of the government, rather by the market forces i.e. the buyer and the seller themselves.

Addressing Market Solution at the Local Level

The primary level where the problem of market failure in higher education exists is at the local or regional level which faces the challenge of low supply and demand in the market. The reason for non-performance of the markets at this level is a smaller number of transactions resulting in a lower return on investment for the suppliers who are equipped with the necessary capital. Another reason for the failure of the higher education market at the local level is the low initial demand by the consumers. Various factors affect the demand, namely affordability, lack of interest, etc. Thus, it becomes important to address the failure at the local level by adopting a mechanism leading to an efficient market for higher education.

To address the problem of failure in the higher-education market, it becomes important to identify whether there is a proper flow of information about certain problems and solutions at the local level. This requires a quantitative as well as qualitative diagnosis. In this regard, interaction with consumers can prove to be a very effective step. Not only do the consumers reflect their needs but also suggest ideas and policies that can be adopted to rejuvenate the market. Additionally, opportunities should be provided to businesses to reflect their problems and needs. This would result in providing valuable insights regarding how markets can be stimulated.

At the local level, the problem of market failure can be simply addressed by adopting a policy through interaction between the sellers and the buyers. For creating a self-sustaining and efficient mechanism, certain fundamental facts need to be present. First, identifying the buyers and suppliers of higher education. Second, identifying the importance and worth of the product i.e. higher education. Third, recognizing the value of the product as well as to find a relation of the value with the solution. Fourth, enlisting the characteristics that have led to the market failure of higher education and finding the best-suited configuration of higher education institutions i.e. formal sector and informal sector to address this peculiar issue. Fifth, analysing the interdependency of the market with the other market systems to ensure that the market works efficiently.

These criteria determine the nature and kind of intervention that would be best suited for market failure. Interventions by the govt. authorities, public bodies, or businesses are subjected to the specific kind of market failure in the area.

Identifying the Importance of Government Intervention

The failure of the higher education market makes it necessary and justified for the government to intervene. As we are aware that the imperfections of the market lower its efficiency and lead to failure in the credit market and equity concerns. These imperfections further create positive externalities. Government interventions ensure that the imperfections are mitigated significantly. The rationale behind government intervention is the presence of certain market failures that the market forces are unable or unwilling to resolve.

Government intervention can be undertaken in numerous ways, including small scale and large-scale interventions to bring back the level of Higher education to the efficient standard. These interventions include numerous approaches including public subsidies for teaching, provisions for student financing, introducing an effective channel for the passing of information, and regulating the market for Higher education. It is imperative to note that there exists an umbrella of policies and not just a single solution to deal with market failure. Despite all the criticisms levelled against governments and their role in economies, the truth is that few markets exist without some interference or guidance from governments.  In order to ensure that a market works at the optimum level and delivers its complete benefits, the rules, regulations and institutions of the government must be present in the market.

There are several steps that the government can and should take to address this problem in a better way. First, identifying the reasons and causes of the market failure of higher education. Second, assessing the role played by the government in specific areas of the market and identifying which market failures can be addressed through non-market institutions. Third, framing policies that have the perfect proportion of both the free market and government intervention. The proper role of government in the marketplace is an old and fundamental one. Economists also believe that the limits and strengths of the market, as well as that of the government interventions, are of immense importance when dealing with addressing government intervention in the market.

To address the different problems that lead to market failure like monopoly, information asymmetry, etc. various measures can be adopted by the government. The above will be discussed in the next part.

Views are personal.

Image credits: EdChoice


Samarth Agarwal is currently pursuing law from National Law University, Jodhpur.

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