The theory of inter-temporal choice tells us that students should be willing to invest in higher education in order to acquire future earnings. How can this help economists decide at what level fees should be set?

We have suggested education and training associated with lower unemployment and higher earning, what factors motivate some workers to remain at school or university while other workers drop out before they finish high school?  Basically, people will calculate the rate of return that requires the present value of future benefits with the present value of costs. This is the private POR. If the POR greater than the interest rate, then the individual should invest in education. We assume that workers acquire the skill level that maximizes the present value of lifetime earnings. We assume that Education and other forms of training are valued only because they increase earnings. Let us consider the situation of an 18 year-old male who has just finished high School and who is contemplating whether to enter the labour market or to attend university and the delay labour market entry by an additional four years. In order to model easier, we assume the wage he gets after high school and after university constant, When entering the labour market, the high school graduate earns Whs pounds annually until retirement age. If the person chooses to attend university, he gives up amount of A in labour earnings and incurs direct costs of B, on tuition, books, fees etc.  After graduation he earns Wuni  pounds annually until retirement. So there will be two kinds of cost if the person goes to university, which the direct cost B and opportunity cost A. If university graduates earned less than high school graduates, no one would attend

University and obtain the university education. So Wuni> Whs.  We assume that a person’s education decision maximizes the present value of lifetime earnings. The person attends college if the present value of lifetime earnings when he gets a university education exceeds the present value of lifetime earnings when he gets only a high school education or more strait forward if C> A+ B. how does this influence economists setting the level of fee? Obviously, they need to take the rate of return and interest rate into account. If the interest rate is too high, and the rate of return isn’t very impressive.  People might not attend to higher education.

Here comes a question, in a country with higher rate of return on education and a reasonable interest why not every single people attend to a higher education?  There must be some sort of limitations as it applies to the market for higher education or some forms of market failure. Not every people will make the rational choice, some people are present oriented, and some people are not. People who are present oriented have high discount rates and are less likely to invest in schooling. For the others who try to be rational was limited by the inter temporal choice model itself, "Rationality" assumptions built into to any inter-temporal optimising model is so Demanding that "sort of trying to get it right" will get you no where near the Predictions of the full-rationality-perfect-information model.  Any model based on prediction gets the problem of risk and uncertainty, in some extend, expectation has played a role in people’s decision making.  In addition, there is always a inequality in education market, not every people are capable for a education, the reason can be many kinds of, for instance, you or your family, might not be able to afford the cost, although, the poor has higher expectations on rate of return than the rich.  Further more, externalities as a form of market failure has been shown in the education market, people after higher education would bring wider benefit to society than private sector, by definition, it is the market failure.  The other problem such as capital market constraints and case for government intervention in provision of education is also shown in the education market.

In conclusion, higher education is doubtlessly helping people get better future earning. Although the current economical model has it’s limitations, but in large extend, it’s greatly helped people with decision making. Although people argue that, if graduates are more able, then the earnings premium may reflect ability rather than returns to education, we could never ignore the improvement on skills and abilities we gain from education and training.

Zhiyuwan

Second year  pure economics