Abstract
Lacking guidance of general equilibrium (GE) theories in public economics and the corresponding proper mechanisms, China has not surprisingly witnessed an inequality in educational expenditures across regions as well as insufficiency of funds for education in poor areas. It is wrongly thought that what happens is due to the decentralized financing system of basic education. This essay attempts to demonstrate that such a decentralized system is capable of encouraging local governments to improve the quality and efficiency of basic education. This is possible if the central government is involved in designing specific countervailing policies to reduce the negative impact of unequal access to education and sorting phenomenon on human capital accumulation for low-income families. This has particular significance for growth in a country that has a massive labor-intensive sector.
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