Notes on Distortions in the Market for Educational Services.

The document analyzes economic factors that might cause the output of educational services to diverge from the theoretical optimum because of a divergence between marginal social valuation and marginal social cost. Education contains both investment and consumption aspects. The analysis shows that the only distortion resulting from uncertainty arises because information is a public good whose supply should be increased: there need be no distortion attributable to "capital market imperfections"; all else being equal, current tax laws encourage relatively too much educational investment in human capital. Additionally, the educational services market is in disequilibrium because the education boom of the 1960s left it with a large fixed investment in buildings and many tenured teachers; a mother's education importantly affects her children's future success, the father's less so, but the present value of this future intergenerational transfer is small. Tentative conclusions indicate an increase in social subsidy of education is justified and should be directed to grade schools. An 18-item bibliography is included. (Author)