The theory of externalities applied to primary school registration in Singapore
Some interesting information on Ronald Coase
The Nobel Press Release on Ronald Coase
With some thinking, you could apply the theory of externalities beyond the common pollution scenario. What is true in all these applications, however, is that externalities could indeed result in sub-optimal outcomes. As you have learned in this week's tutorials, government do not attempt to correct these externalities since the cost of acquiring relevant information may be too high and such cost may exceed the benefits of correcting them.
There is a path-breaking and yet relatively pedagogic article that extends this theory into explaining conformity behaviour among individuals. George Akerlof (1997) in the 65th volume of Econometrica (pp. 1005-27) showed how we could incorporate a utility function in the form of
U = -d |x-x*| - the intrinsic utility of x
where the agent loses utility given by the term d |x-x*| ( a negative externality) if he chooses a value x that does not conform to society's idea of what x should be, given by x*. He showed that there can arise many different equilibrium situations of the choice variable x, depending on the value of d, the individual's degree of conformity.
It is when Akerlof introduces heterogeneity into individuals that made the analysis very interesting. He showed that, due to the need to conform with others, it is very possible that an individual, who would have choose an optimum x without d |x-x*|, might choose a lower level of x once we introduce conformity in the model. As I was reflecting upon this, I begin to understand why, in Singapore, there are many parents who are so keen in registering their children in top primary schools. In the past, there were even cases where a parent actually gave a false address so that their daughter would qualify to go to such a school. Using this model of social distance, a person's decision on how much education to consume depends not only on the intrinsic worth of that education to the individual but how his or her peers view as the 'correct' level of education. A parent would most likely expect top primary schools to have a higher proportion of students who study harder. Thus, he is hoping that his kid would, by himself, adjusts his studying level to avoid straying from others. In contrast, another school might have more students who are less enthusiastic about studying and if their kid were to step into such a school, he will also adjust the level of studying to what would be a level lower than the efficient level. Of course, the recent news of a President Scholar coming from Merlimau Primary School should not affect this analysis significantly since what are the chances of your kid meeting a person like him?
Sociologists would regard this process as 'social stratification', where students from schools like RGS and ACPS, tend to be from the more well-off families. The economic explanation here would be that these parents are more able to take into consideration social distance as an important factor in motivating their children to study hard. Other parents will not have this ability and thus must find other ways to motivate their children: such as moral suasion, punishment, extra tuition and so on.
Of course, this idea that if you go to a good school, you will benefit from the people who are there, is not terribly innovative. The greater significance is that economists are beginning to acknowledge that outcomes do not just depend on an individual's initial endowments but could also depend on his social grouping. In fact, I am thinking of many different possibilities of extending the above model into explaining the behaviour of Singaporeans, such as the use of Singlish, the bad attitude in our service industry and many other situations. Perhaps graduate school and the two years of mathematical 'brainwashing', will help me in this aspect. I can only look forward to it J .