Adamas University Economics, Education

New Education Policy 2020: Welfare Economics Perspective of Policy Design

What a policy is

A policy is a plan of actions toward achieving certain goal of any private or public community. Lending policy of a private sector bank is an example of the former whereas education policy is an example of the latter. In this document ‘policy’ will imply public policy. As an example of public policy the New Education Policy will be referred to here.

Why is at all a public policy required?

A public policy is one of the tools in achieving a number of goals, e.g. mitigating socio economic inequality, towards implementing the Directive Principles of State Policy in the Constitution of India.

What is the theoretical underpinning of a public policy?

(a) Failures and attempts to address facts of life: The theory of public policy originated from the failure of all disciplines of study to answer hard questions of life like (i) why this baby is born on a street when that child is born in a golden bed at the same time, and the consequent endeavours to answer the question (ii) what the fate of the street-born baby would be in terms of being a blessing or curse for the society in future?

(b) Welfare Economics: The discipline of Welfare Economics, a specialized part of Microeconomics tries to answer the latter question with the help of the theories of market failure, externalities and internalization of externalities.

(c) Theory of Consumption: In terms of Microeconomics consumption of food, cloth etc by a baby is financed by the guardian. When the child reaches the adult and starts earning, gradually his income increases over and above consumption. When his guardian becomes old his income falls short of consumption, the grown up child can repay the above finance by taking care of the latter during old age.

(d) Theories of Externalities and Market Failure: An individual’s cost of own consumption is a private cost but the cost of other’s consumption is a social cost. Similarly an individual’s benefit derived from a good purchased by him is a private benefit but if he derives benefit from a good purchased by somebody else, it is a social benefit. The differences between social and private costs and between social and private benefits are called externalities. The excess of the social over the private is called positive externality and the vice versa. The inequalities between private and social costs and between private and social benefits are called market failures. Market here means equality between the cost to be incurred for and the benefit to be enjoyed from an additional unit of consumption of a good or a service. By the common parlance ‘market’ used by laymen means the same because in the market a buyer tries to bargain with seller over the price if the buyer feels that the above cost is more than the above benefit and the seller tries for the reverse by demonstrating that the above benefit is more than the above price. At some point of the bargaining process, both the parties strike the equality between the two.    

(e) Internalization of externalities: Market failure can be corrected by arranging equality between social cost and private cost, e.g. punishing an offence and between social benefit and private benefit, e.g. rewarding an act of bravery. The State facilitates the internalization process by providing public goods like police, defence, judiciary and so on.  

(f) Applications of the Theory of Consumption: Homes run by the governments, trusts and religious institutions provide finance for consumption by poor children or orphans.

(g) Application of Externalities and Market Failure: Free goods and services are out of the purview of Economics discipline. Here ‘good’ will mean a good or service available at a price. Every activity involving a good is called a transaction. There are certain activities that lead to market failure and generate externalities. Expenditure by a government or donation by a private party generates positive externalities while taxation, crime etc generate negative externalities.

 A human being has a body and a character. There are prices of physical organs, bones and blood as informed by crime reporters but there are higher prices of character, talent and other mental faculties computed in Human Resource Management. If a criminal provides for consumption of the street-born uncared child in order to derive future benefits toward criminal profession, that child will grow into a source of negative externalities in future. On the other hand if the government or some trust takes care of the child, the result could be expected to take the form of a responsible citizen, a stream of positive externalities in the society. 

Design of National Education Policy 2020 (NEP)

Economists view education increasingly as central to issues of development like productivity, income distribution, employment, and knowledge as an input to production. They offer varying opinions as to whether education is a public good or private good. Despite the aforesaid differences, education whether private or public, aims to provide the educated with the access to the market with higher purchasing power, addition to aggregate demand, expansion of production and rise in national income. 

There are three new dimensions of the NEP over the National Policy of Education 1986 – (i) the digital dimension, (ii) holistic multi disciplinary dimension and (iii) marketing dimension. It revolves around the public good aspect of education. An economist believes that education as a public good has three objectives – expansion, excellence and inclusion; education as institution should build up human capital and education as an input in the production process should contribute to product development, upgrade and innovation. 

Expansion: The NEP encourages expansion of education across arts, disciplines and languages.

Inclusion: The NEP encourages adult education and discourages coaching centres at school level where the poor or those who do not have purchasing power do not have access. It encourages private institutions to offer subsidized or free education and scholarship.

Excellence: The NEP prescribes scholarships to rural meritorious students.

Human Capital: The NEP prescribes enhanced investments in vocational education and multi disciplinary education. High skilled human capital is supposed to facilitate innovation in businesses.

Input in production process: The NEP encourages marketing of Indian Education as a product for sale to foreign students by prescribing such activities in institutions of higher education. 


Failure of public policies to correct market failure through misuse of public goods has given rise to preference of the capable for the private over the public and generation of demand for commercialized services of public good character, e.g. private education, private health, private security etc.

The NEP terms a teacher to be central to the education process but in the private education industry and corporatized institutions, where the faculties and departments are shaped as profit centres, neither does a teacher stick to one institution for long time nor is there is any job security even if he wants to continue and as such there is drainage of institutional knowledge disrupting the human capital formation process. The reason is given below.

The NEP prescribed non-profit governance of private institutions. Materialization of the same is difficult for efficiency reasons. The measure of efficiency differs across sectors and firms over time. In the discipline of Economics, efficiency in a market economy means every factor of production earns its maximum possible remuneration from its best possible use without any wastage and is free to switch to another employer if the ongoing employment is inefficient. In the discipline of Human Resource Management efficiency means the yield of output to the inputs. Accordingly the HR divisions of the private universities design efficiency measure in the name of performance appraisal. In a command economy or in a mixed economy with a public sector of education neither can a factor switch to another employer or nor can his performance appraisal vary over time because the static measure of efficiency that is obtained during the employment process does not change till the stipulated time of retirement. So there is no motivation of either party for information asymmetry. The sovereign guarantee of tenure of a factor in public sector plays the role of job security during the tenure. However that is a source of moral hazard in the public sector but both moral hazard and information asymmetry exist in a private education industry. The temporary or contractual nature of employment in the monopolistically competitive structure of private education industry with the dynamic nature of efficiency measure generates enough motivation for moral hazard and scope for information asymmetry. The above motivation is reflected in the tendency of a factor to auction itself every moment to the best bidding employer. The above scope is reflected in the uncertain future contingencies. As long as factor movement is allowed free, institutional knowledge and specialization cannot build up for research and innovation.

The future will tell how far the NEP is successful in curbing commercialization of education and how the private institutions fulfils the aims of this policy.

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