Education, Change of Consumer Preferences and Growth

The paper examines the effects on growth of both private and public investment in health, schooling and culture: in short, education. These expenditures exert two effects on the growth rate: (i)they increase labour and capital stock productivity through a positive externality, and (ii) they modify saving and investment decisions through the substitutability between education and private consumption. The different effects on economic growth of publicly financed education and private investment in education are investigated. The optimal growth rate depends on households’ preferences for education. Moreover, there will be always an optimal tax rate that produces the same rate of growth in alternative regimes, private and public, of education financing. Universalistic public education exerts a strong positive externality on the economic efficiency but unlike private investments it does not create sufficient incentives through income differentials to change consumer preferences for education. JEL:H5-O4