To answer this question first draw a diagram containing the data given in the question, as shown in Figure A1.4. We know that the budget of the bureau would be maximized, if it is forced to quote a price, by setting the price at P1. Any price above or below P1 would result in a smaller budget being available. However, if CC1 is the cost schedule, and the bureau's cost curve is not known to the sponsor, then the bureau has an incentive to overstate its costs, if it wishes to maximize its budget. It therefore quotes P2 as its price. However, if the bureau's cost curve is CC2, the situation is very different. The largest budget must equal its actual costs. A price above P2 would reduce the size of its budget. A price below P2 would result in the bureau being in deficit but it has no source of funds to cover a deficit. A bureau with cost curve CC2 would therefore have an incentive to reveal its actual costs of production.
Figure A1.4 A monopoly bureau facing differing cost conditions
Comparing Figure 7.1 and Figure A1.4, it is noted that the former diagram depicts a situation where the bureau can control both the price quoted and the quantity supplied, subject to the budget constraint represented by the area Oeq3. The bureau can under-produce or over-produce depending on whether it seeks to maximize a ‘quiet life’ or ‘size of budget’. In the case depicted in Figure A1.4, the bureau can under-produce if CC1 is the relevant cost curve but it can neither under- or over-produce if the relevant cost curve is CC2
Further questions about bureau behaviour are bound to suggest themselves by this modification. The quotation from Leslie Chapman (1979) (see Example 7.4), indicates that civil servants may alert politicians and the public to bureaucratic practices, which may encourage their closer investigation. Risk-averse bureaucrats may be wary of pushing their luck too far in inflating costs, particularly if, as suggested in Section 7.4, there could be bureau competition. In short, models of bureaucratic behaviour which seek stable equilibrium solutions have distinct limitations. They are useful in depicting the thought processes of sponsoring agents and bureaucrats, but the results will alert the ‘bargainers’ to other courses of action which make stable solutions implausible.
This question is not easy to answer. It requires knowledge, or at least the power, to improvise an answer, and drafting skill. (Only 1000 words allowed – impossible!) The way around the knowledge difficulty is to make up your own assumptions about the main characteristics of Eutopian educational finance. The implication of the Minister's statement is that, at present, school education is provided by state institutions and is free (see Example 7.1). The second difficulty can only be circumvented by practice. You must know that busy ministers and captains of industry do not have time to plough through long papers – remember Winston Churchill's preference for one-page memoranda. All the Minister can demand and expect is an agenda for further discussion, and in fact the request is for ‘outline proposals’ only.
It will have occurred to you to begin by jotting down the main points under a series of headings, before formulating an answer. These might be arranged as follows:
The Minister is in effect wishing to consider a change from a system in which schools are run by the Ministry and financed out of taxation to one in which schools are privately owned or at least receive no government funding, and fees are paid.
Schools could be sold off to private owners (who could be non-profit making charities) or leased to private suppliers. The main difficulty here is finding managers with the requisite experience of a ‘market’ situation – a difficulty which does not arise, for example, in privatizing airlines.
If the standard of education has to be decided by government the schools must be licensed and subject to government inspection.
Compulsory ‘consumption’ by children is not affected by the change in the system of provision itself, but charging may increase parental resistance to complying with the law.
Charging would be onerous on poor families, as well as discouraging compliance with the law (see (iv)). This suggests that the government should support such families by a grant (voucher) to be exchanged for education services at the chosen school. If the distribution of income is not to be altered, some such system is unavoidable. There would be administrative difficulties in identifying poorer families. Perhaps these difficulties could be met by giving vouchers to all families, irrespective of income and adding the value of the voucher to the taxable income of parent(s).
Competition between schools might improve efficiency but there will be complaints from three sources. Parents in isolated areas may be faced with a one-school monopoly – this suggests that the Ministry may have to have a system of price control. Teachers will strongly dislike a system in which badly run schools are liable to be closed down – perhaps we should encourage ‘MBOs’ (management buy-outs) by teachers so that at least they run schools themselves. Educational pundits will argue that parents lack knowledge of what is the best education for their children and should be discouraged, in the interests of children, from shopping around – some sort of education advisory system for parents may be the answer.
Having sorted out the arguments relevant to the preparation of the memorandum, the student should now be able to proceed to writing it. Having done so, it is worth looking at other proposals for privatisation pointing out the contrast between privatisation of public enterprises already producing goods and services for sale, with social services, such as the UK National Health Service, in which charging is very restricted.
