Monday, March 5, 2012

College Tuition

Catherine Rampell of The New York Times has an interesting post on the Economix blog on the increase in college tuition.  Here is the main graph that shows the trend:

Source: New York Times from Bureau of Labor Statistics Data

This increase is driven by both private and state universities and colleges.  For state schools the most immediate cause is clear, we are shifting the burden of the cost of college to students themselves and away from the public:

Source: New York Times from State Higher Education Executive Officers

It seems to me there are two ways of thinking of this shift.  One is that college education is increasingly vital to a productive and prosperous life not only for those who get it but for those who live in communities where college graduates congregate.  This suggests that society has a large interest in subsidizing higher education investments to capture those spill-over effects.  The other is that as the college wage premium increases relative to high school diplomas it make senses, perhaps, to shift the burden more to those recipients themselves and away from non-recipients.  I happen to believe the former is the dominant principle here: consumption goods with sizable positive externalities need to be subsidized in order to get efficient outcomes.  But to know how much they should be subsidized, we need to know how far away from that efficient point we are.

There is also another aspect of these numbers which is the fact that these are list prices for schools and many students pay far below the list price.  Colleges are perhaps the worlds ore effective price discriminators: charging different prices to different students based on their incomes.  This is a good thing if the goal is to increase college graduates for economic theory shows that, generally, quantities increase with price discrimination.  If colleges and universities are just practicing more price discrimination than these numbers aren't nearly as worrying as the would otherwise be.

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