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Sunday, October 25, 2009

The Economics of Education Continued

I have been breaking this portion down for readability. The last section was about how government subsidies, student loans, and other debt tools continue to make tuition rates rise. I believe this parallels some of the financing trends we see vis-a-vis Yeshiva tuition where families beg, borrow, and sometimes even steal to continue to pay ever increasing costs. The last section also examined the bundling of services and how tuition payers are told they are getting a good deal, and therefore shouldn't complain, when in fact there is no average cost of a joint product. At the grade school level, I believe Yeshiva tuition is mostly reflective of cost, but by the high school level there is certainly a bundle of products in some schools.


It may seem odd that college admissions directors are under heavy pressure to enroll more students, if the college are losing money on each student enrolled, as academic administrators so often claim. When Darmouth vice-president Robert Field announced that the college was accepting more transfer students, in order to bring in more revenue, the Dartmouth Review asked editorially: "How can Field make more money on new students when every time he raises tuition, he claims tuition pays for only half the cost of each student?" The probing question goes to the heart of the economic issue, and its answer depends upon incremental costs. Once a college is built and its dormitories and classroom buildings are in place, the additional or incremental costs of adding more students is relatively low, so long as their numbers do not exceed the existing capacity. Within those limits, adding more students may well bring in far more additional revenue than any additional costs they represent.

The claim by college administrators that tuition does not cover the average cost of a college education is both meaningless and misleading. It is meaningless because there is no such thing as the average cost of a joint product, and it is misleading because there is no more reason why tuitions should cover all the costs of a college than there is for magazine subscriptions to cover all the costs of producing a magazine. Advertisers often pay most of the costs of producing a magazine or newspaper, and advertisements, just as academic institutions produce both teaching and research. No one believes that magazine are doing a favor to their subscribers by offering subscriptions at prices which do not cover the average cost of producing the magazine. Nor do magazines make any such sanctimonious claims.

It is commonplace in the ordinary business transactions of the marketplace for joint products to be sold simultaneously to different groups, no one of whom pays enough to cover the total costs of the business. A professional baseball team not only sells tickets to those who enter its stadium; it also sells television and radio rights to broadcasters who cover the game, and rents out the stadium to others who use it for rock concerts, boxing matches, and other events while the team is on the road or during the off-season. If ticket prices for baseball games rose to exorbitant levels, it would be no answer to the fans to say that they were still not being charged enough to cover the total costs of the baseball club. Yet colleges and universities use this as an argument against students and their parents who complain about exorbitant tuition.

More to come, most importantly about how schools can maintain a monopoly while costs skyrockets. Extremely important to help understand why it is difficult to create alternatives within the market!


Mike S. said...

Schools do not maintain a monopoly. There are literally thousands of colleges and universities in this country, of varied quality and price.

Anonymous said...

This comment probably goes with the prior post, but I am not convinced that the availability of student loans drives up tuition that much. Sowell makes that assertion, but does not seem to back it up with any analysis or studies. More important, what is the alternative. What would happen if there were no more government student loans, and would it be a good thing? Is there a middle ground - i.e. you can only get a government loan for a school that charges no more than a specific amount?

Charlie Hall said...

Mike is correct; the idea that universities are a monopoly is ludicrous.

I'd also like to see some empirical evidence that student loan availability causes tuition to increase. Sowell in the past has criticized others for making ideological statements that aren't based on empirical data and he seems to be doing that here.

Offwinger said...

There is a lot of price discrimination here that is not being addressed, in addition to other aspects of monopoly and government subsidization.

Simply put, students do not all pay the same tuition and tuition levels are not designed for everyone to pay the same amount.

As tuition levels have risen - on paper - I'd like to see a breakdown of how much more $ are coming in from tuition and where that money is coming from. Is more being shelled out in government aid? Are students taking on more gov't subsidized low-rate debt? How does that relate to government funding of universities more generally? For example, I was working at a public university when our in-state money was decreasing every year. If that same net amount was allocated for student aid or low-cost loans, then it's really a wash. Basically, I'm curious to see what amount the government is actually footing and how much has that figure changed over time.

One other thing: The sport analogy is a terrible one. Without going into all the details, public funding has largely financed those stadiums from which teams earn revenue. Legal protections have allowed for monopolistic behavior (e.g., bundling of all NFL games for broadcast or antitrust protection for baseball, etc.). And many sports franchises have one or more of these characteristics: (1) They are deliberately run to achieve accounting or tax losses; (2) They engage in "self-dealing" that distorts their true revenue stream (e.g., undercharging for broadcast rights because the same company owns both the team & the network); or (3) They are hobby or family "business" side-projects that are not valued for their bottom line.

I can't imagine why anyone would use the sports industry and its economics as a model for ANY argument.

Charlie Hall said...

"The sport analogy is a terrible one. "

Great point. Dr. Sowell is not some clueless right wing talk show host; he is an accomplished economist and knows better than to use such a bogus example.

Dave said...

I don't think you're going to be able to draw a solid parallel here.

The cost of not going to college at all is fairly high in terms of longterm income, but there is little social impact to which college someone attends in most social circles.

Contrast that with parts of the Orthodox world, in which (at least it appears to me), the penalty for going to the wrong school (or worse, public schools) can approximate ostracism.

Commenter Abbi said...

I thought the newspaper/magazine analogy was pretty poor also." No one believes that magazine are doing a favor to their subscribers by offering subscriptions at prices which do not cover the average cost of producing the magazine." Really? Than what do you call undercharging for subs other than a favor? Subs are guaranteed circulation numbers (higher numbers= higher advertising rates) so of course they are going to undercharge the newsstand price.

And how this relates to the university's business model I still can't understand.

Anonymous said...

According to this article ( law school tuitions now are much greater than the cap on federal student loans, leaving students to take out more expensive private loans. The fact that students are still applying and going to law school in hoards seems to contradict Sowell's theory that government loans drive up tuitions.

Miami Al said...

To suggest that student loans don't drive up tuition is absurd, basic economics, increased cash availability for tuition increases the demand for the service, which means more people use the service at a higher price. The increase in price is less than the amount of the subsidy. Student loans DO result in more people getting an education, albeit at a higher cost for those that do not get the subsidized loans, and some people get the education anyway.

The "unique" aspect of the educational labor market is really common to most non-profits, is that they aren't "tamed" by the market, their competition is in fundraising, not operations, and they are normally headed by someone that is more likely to sympathize with employees than confront them.

A university professor, unless a political appointee, is often a professor, sympathizing with the plight of the professor, etc.

I think that the parallels with the Yeshiva world are MINIMAL at best. A research university is a research institution that provides graduate educations because grad students help research, and undergraduate education out of a combination of custom and the help financing the operation. They also do so because it creates the alumni base that is their future supporter base, etc.

The parallel, a Yeshiva is normally run by a Rabbi who are a primary loyalty to the Rabbeim. The donation base is giving money to support student education. The tendency to create more and more positions to support jobs for those in the Academic or Jewish community is real. However, Universities aren't tasked with educating as many students as possible, they are selective for a reason, and that's a HUGE difference in the implications of the financial problems. An increase in tuition at the university level only matters in that you may lose "qualified" students and become less selective, and increase at the Jewish school level means children that don't get a Jewish education, and while the same happens down the line in the University World, the University President isn't on a mission to education "all potential students."

Charlie Hall said...

"The fact that students are still applying and going to law school in hoards seems to contradict Sowell's theory that government loans drive up tuitions."

The situation is even worse for medical school, dental school, and veterinary school.

"To suggest that student loans don't drive up tuition is absurd, basic economics, increased cash availability for tuition increases the demand for the service, which means more people use the service at a higher price."

You are arguing from ideology. Show some empirical evidence. What has been presented in this comment field so far would tend to disprove your point.

Anonymous said...

Charlie: The hoards applying to law school don't make a lot of sense. The job market for lawyers has gotten very tough and the average or median incomes are not nearly as high as people think. A small percentage at the top make huge bucks, but many struggle. Vet, Med and Dental school I can understand more. There still is great and growing demand for MD's and DMDs, and even with the downward pressure on M.D. fees, M.D's after a few years of practice (particularly in a specialty) still consistently tend to earn in the top 5%. For Vet school, if you are going to be treating pets (and not farm animals), there also is growing demand. People don't cut down on spending on their pets unless really desperate. Besides, most who go into veterinary medicine do it for sheer passion and love of animals and medicine.

Charlie Hall said...

"The hoards applying to law school don't make a lot of sense."

I agree. And in addition to the arguments you make, most lawyers I know don't like their work. To me it is one more counterexample to the arguments of economic theorists that people act rationally.

"still consistently tend to earn in the top 5%"

True, but the debt load is staggering. My wife's debt at the end of her training (MD, then family practice residency) was over 200K. And family docs don't make anywhere near the amount of money people think they do.