Private Returns Versus Social Returns

As there is subsidisation of education by the state in all countries (and a little higher subsidisation in developing countries) it happens that private costs will be low. Returns to an individual due to low private costs will definitely be higher than the returns as taxes on income of the individuals for the state due to relatively higher public costs. Hence private returns work out to be higher than social returns. The unit costs of primary education are quite low. But their social returns may be high. To illustrate this, let us look at this situation notionally as follows.

Treating the opportunity cost of secondary education as foregone income, let us add it to the income of primary school graduates who are in the work force and earning. Let us then aggregate the private returns of all such workers with primary education to derive the net social return for primary educated workers. Then the social returns to primary education will far exceed those to secondary and higher education. Likewise, the returns to education in developed countries have already reached their full potential and any marginal investments will not lead to substantive additional returns.

This is not true of developing countries which have a high level of illiteracy and low average level of educated population. Even marginal investments will generate knowledge and skills that lead to higher levels of productivity and income. Hence, social returns for developing countries are higher than those for developed countries (Psacharopoulos and Hinchcliffe: 1985).