The concept of Pareto efficiency, a scenario where no improvements in the allocation of goods to benefit individuals without making others worse off, is integral to this scenario. A Pareto efficient outcome is the socially optimal; however, additional government involvement is sometimes necessary where the free market has failed. The negative impact on parties not involved in the transaction, accrued to society as a cause of only a small number of students attending university, i.e. the negative externality, to be corrected will manifest itself in stagnant growth in the standard of living and national income.
Education is usually classified as a merit good. However, in Great Britain it can be argued that it has become a public good, a non excludible good with externalities where it is possible to get a free ride, though requiring initial investment, especially in Scotland where there is no university tuition. Because tax revenue is used to finance university education, the question becomes that whether the estimated social benefit outweighs the costs associated with it. The issue is subjective, only inferences can be made from the experiences of other nations, such as the Soviet Bloc, where free universities equaled a high degree of technical knowledge, but not implementation due. What is known however, is that the public is inclined to underconsume merit goods, and thus not fully reap the benefits associated with them.
The UK ranks below average (1.44% of GDP as compared to other G8 countries) in spending on higher education, but above average (17.3% of the above) in financial aid for students. These policies may have been created by a Labour government seeking public support. The cause for the policies notwithstanding, it is true that a more educated workforce results in higher productivity and improved employability and mobility. Also, higher earnings of better educated personnel result in greater government tax revenue, thus costs are recouped and the MSB curve shifts out as seen below.
Nevertheless, the accuracy of the theory can be disputed. The social benefit as created by higher levels of education is intangible, and thus inaccurate, because of the difficulty in measuring increased cultural and personal health awareness. There are also uncertainties in assuming the surety of foreign companies moving to Britain simply because of perceived education levels.
The student union’s response that the suggestions come from an elite group of individuals who will gain from universities once again becoming solely for their children holds some truth. A highly competitive job market may be to blame, but such a market is inevitable and necessary for development. It is the middle class who has the most to lose by the removal of subsidies and bursaries, as the very poor will still receive financial assistance. On one hand, the government will regain the sizeable funds it has been spending on subsidies, funds that can be used to pay off national debt, or spent in other programs. This may be beneficial for the British economy as a whole, but it is unknown whether the benefits from freeing up capital outweigh the costs of such a move. Taking into account the current economic situation, it may be tempting to temporarily decrease subsidies. However, that cut to funding would have long term negative implications for the state of British science and technology, at one point a shortage of scientists and engineers would appear. Rather, it may be prudent to divert these subsidies into achievement based grants in economically fruitful fields, such as science and technology. In addition to these measures, the government may try to alleviate the immobility of the factors of production, in this case universities, promoting e-learning. This approach as practiced by MIT which posts free lectures online, would make higher education nonrivalrous (there is no feasible limit on hosting), and thus closer to a socially beneficial public good.