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Box 5.4 Are SCPs Cost-Effective? (continued)
For the second definition, tax rates are a critical piece. For simplicity, the same tax rate is assumed for workers at all income levels. Under this definition, by construction, fewer programs are cost-effective compared with using the first definition. For example, if a program yields a 30 percent increase in lifetime salaries and the tax rate is 10 percent, tax revenues will rise by only 3 percent. Clearly, a 3 percent tax revenue increase is less likely to surpass the program’s cost than a 30 percent salary increase. Hence, it is possible that many programs that are, on average, cost-effective under the first definition are not cost-effective under the second definition. However, any program that is not cost-effective under the first definition would not be cost-effective under the second definition. Hence, the first definition allows the policy maker to rule out programs that would not be cost-effective from a productivity or fiscal standpoint. Perhaps the main drawback of these calculations is that they do not include other program benefits, such as improved health for the individual and her family, or the individual’s positive spillovers on her community. These types of benefits are notoriously difficult to measure. Thus, the calculations can be viewed as a lower bound of total SCP net returns.
Oversight and Regulation Some might believe that, once students receive and process the appropriate program-level information, they will act as informed consumers, making “good” choices that will discipline the market and eliminate the need for oversight and regulation. Appealing as this sounds, it is not correct. The SCP market—and, in general, the higher education market—is not perfectly competitive, as providers often enjoy market power and many students have few or no options (see box 5.1). These “market failures” are particularly salient among SCPs given the students they serve. And, of course, the assumption that these disadvantaged students would have the time and ability to monitor programs and institutions is rather implausible. Oversight and regulation are therefore critical—not only for the sake of a well-functioning market but also for the sake of equity.15 One of the main SCP shortcomings is their large quality variation, which poses a risk to students and may account for much of the SCP stigma. Regulating SCPs and holding them accountable are critical for the existence of a competitive SCP market where only high-quality programs are offered—or, at least, one in which all programs are above a minimum quality threshold. In principle, good regulatory and quality assurance systems should perform the following tasks: • Authorize only the entry of programs with expected high quality. The screening of new programs should be based not only on the proposed curriculum and training, but also on proposed activities to interface with the private sector, promote graduates’ employment, compete against similar programs, and perhaps provide financial aid to students. It should also be based on the institution’s record with previous programs and the expected labor market outcomes
