February 12, 2004

Investing in Education

A production possibility frontier also provides a nice explanation of the decision to invest in education, particularly the decision to borrow money to finance an education.

Again, the most important point is that access to financial markets makes the agent better off. In this case, a government guarantee (or a parental signature) is often necessary to secure that access.

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Subsidizing the student loan rate can make the student even happier. We analyzed the potential misallocation of society's investment resources to see if subsidizing student loans is a good idea.

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It turned out that subsidzing student loans is a very good idea if education entails a large positive externality for society. That is, if everybody (not just the student) benefits from the student's education. An example might be a student who starts a company (using skills learned in school) that generates 1,000 new jobs.

Posted by bparke at February 12, 2004 10:19 AM