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Hong Kong's English Language Industry
A problem of severe market distortion
economic modelling (index | government policy considerations)

Graph 4 - A Summary of the Net Social Gains and Losses


Color Code

Areas of unquestionable social benefit.  
Areas of unquestionable social loss  
Sound investment  
Questionable investment  
Poor investment    
Summary chart
graph 1 | graph 2a | graph 2b | index

Click on graph for further explanation

  Areas of unquestionable net social benefit (graph | index)

This is an area beneath the demand curve found by subtracting the full cost of provision Aadhk from the full utility of consumption Aaghk, or

 Adgh = Aaghk - Aadhk
 net social benefit = social benefit - social cost
 > 0

In particular:

  • Adgh represents buyer and seller surplus obtained from the supply and consumption of high-level language competence traded at Pe.

    • In this instance buyers can be anyone in government, industry, or households desirous of high-level language competence. The price Pe is determined primarily by employers in government and industry who pay a language premium in order to attract individuals with high-level English language competence. Among these employers are also public and private schools in search of teachers with high-level competence and individuals seeking private tutors.

    • Sellers comprise individuals who sell their skills in primary and secondary labor markets either directly in the performance of translation, teaching, or interpretation, or indirectly as enhancements to their primary work skills. Also , included in this group are private and public sector schools who compete for highly qualified students. These latter are driven by the believe that high-level English language competence will enhance their professional careers, social status, intellectual ability, and leisure activity.

As high-level competence can be supplied to the market by anyone who has it, the English language industry tends to be one of the most competitive. Thus, it can be assumed with relatively good confidence, that everyone is trading at approximately the same price.

Finally, It makes no difference who the buyers and sellers are; the same net positive social benefit is achieved.

  Areas of unquestionable social loss (graph | index)

These are areas that lie below the high- and low-level competence supply curves, but above the demand curve for high-level competence. Thus, any individual with high- or low-level competence employed in the ranges along the X-axis described by these areas costs society more to train than they are worth to society.

  • Ahlm corresponds to the amount of social waste incurred from the employment of Qh - Qe high-level language competent individuals in excess to those already employed at Qe. Although the market is willing to employ these Qh - Qe individuals for their high-level language competence, it is unwilling to pay the full cost of their training.

 Ahlm = Ahkom - (Ahjml + Ajkom )
= social benefit - (subsidy + premium)
 = social benefit - social cost
 < 0

The term subisdy refers to the education of low-level competent individuals with public revenue -- namely, Hong Kong tax dollars. The term premium refers to the addtional amount that private and public sector employers must pay in order to obtain high-level language competence.As government is generally unable to provide high-level competent individuals, the private sector must provide the additional training necessary.

In those cases where the government is able to provide high-level competence it behaves very much like the private sector. It purchases high-level competence from the outside and pays the high-level competence premium to obtain it. Thus, the true cost of government supplied high-level competence is no different from that of the private sector and enters the market as a premium above that of low-level government subsidized competence.

  • Aqrs corresponds to the social loss incurred from the employment of Qf - Qh low-level competent individuals. The cost of supplying individuals far exceeds even the benefits that could be received, if their competence were high-level.

    Although their language ability is likely to be of some benefit to those who employ them, the benefit received is almost certainly below that which could be obtained, if high-level competent individuals were employed in their place.

    Simply, the market has no use for high-level competent individuals above Qp when the market is subsidized, and above Qe when it is not.

 Aqrs = Amos - Anosr
 = social benefit - subsidy
= social benefit - social cost
< 0

   Sound investment, good return (graph | index)

This area corresponds to sound government investment in low-level competence, because not only does it pay for itself through the creation of positive social benefit, but also creates market surplus for both the consumers and suppliers of high-level competence. Sound investment occurs when the buyers of high-level competence are made to pay the full-cost of provision, and government supplies only that amount of low-level competence required to achieve high-level competence.

 Aadhk = Aacjk + Aabjk
social cost = subsidy + premium
> 0

Under the current system of universal low-level competence training sound investment is impossible to achieve. Although it is possible to insure the socially efficient competitive market price Pe by constraining the number of high-level competent individuals who enter the market, it is not possible to eliminate the social waste associated with the under-utilized low-level competence. Controlling the number of high-level competent individuals could be partially achieved through the issue of licenses to private sector suppliers of high-level competence. The real problem, however, is the high cost of providing universal low-level competence that serve as a substitute for high-level competence in the absence of a larger market

Ahjq - Aqrs =  Ahks - Ajksr
 = social benefit, if low-level competent individuals had high-level competence minus additional social cost from the provision of Qf - Qe low-level competent individuals
Ahjq - Aqrs > 0
  most likely result, because the actual benefit from low-level competence is probably below that of high-level competence. See discussion under What lies beneath the tip of the iceberg - Graph 2b.

   Questionable investment, poor return (graph | index)

 Though not government waste per se this is money spent under market conditions that lead to social waste.

Aikon = Ph · (Qh - Qe )
= market value

Ahkom = Aikon + Ahim
= market value + buyer surplus
 = social benefit
 = questionable investment

As the social cost associated with this additional benefit is larger than the benefit itself, one can only wonder about the wisdom of supplying Qh - Qe additional high-level competent individuals to the market.

 Ahkol = Ajkon + Ajkom or Ahjml + Ajkom
= subsidy + premium
 = social cost
Ahlm = Ahkom - Ahkol
= social benefit - social cost
= social loss
 < 0

Of course, once the government supplies the additional Qh - Qe low-level competent individuals, the oversupply of high-level competent individuals is automatic. This is because there are important profits to be had by those who supply the additional training required by low-level competent individuals to become high-level competent.

Thus, what may at first glance appear to be a socially beneficial act of coordination between the public and private sector is an important generator of social waste.

The government justifies this waste as a necessary expense in the provision of equal opportunity for all. In effect, it contends that the English language is necessary for success in life, and that everyone should be provided with a fair opportunity to become successful. What it does not tell us is how many routes to success it has closed by placing excessive priority (see discussion paper - opens to new window) on a language that most people rarely use, or only use in a way that cannot possibly justify the cost of learning it!

At some point a child, his parents, and his teachers must decide among a vocational, collegiate, and university career. Why can he not also be given the choice between going to a college with English language entrance requirements and one without before he enters into secondary school? Surely by then or even earlier, he can know, if he has the motivation and aptitude to become a near native speaker. Besides, whatever low-level language requirement he may encounter sometime later in life, he can surely retrap far more efficiently in a six-month night course at a private language school.

  Bad investment, negative return (graph | index)

Beyond the oversupply of high-level competent individuals there remains the nearly wholly inefficient provision of low-level competent individuals. It is these individuals who probably contribute the most to the barrier that English has become to international communication in East Asian society (see discussion paper - opens to new window)

The cost of providing Qf - Qh low-level competent individuals (Anosr) is disproportionately large when compared with the economic utility (Amos) obtained from their employment. The supply of additional low-level individuals does not become cheaper as their number increases, if anything -- as the upward sloping supply curve SlSl in the diagram suggests -- it becomes increasingly more expensive. Moreover, the social benefit received from this additional low-level competence is not nearly as large as the diagram suggests, because Amos represents the additional social benefit from utilizing individuals with high-level language competence -- not low. Thus, the direct net social benefit indicated below is almost assuredly negative, if not zero. This result does not include the indirect international social disbenefits.

direct social benefit < Amos
 direct social cost = Anosr
 Anosr > Amos
direct social cost > direct social benefit

  Chart Summary (graph | index)
Good invesment Questionable investment Poor investment
    Qe - market optimum
  Qh - status quo without universal language requirement     Qf - status quo with universal language requirement
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