By Richard Vedder
In the first couple weeks of any survey course in the principles of economics, students are taught that prices are determined by the interactions of consumers (demand) and producers (supply). Prices for many things, such as oil, or of common stocks, constantly change with the frequent shifts in the willingness of consumers and producers to buy or sell the good or service in question.
Yet the price of college--tuition fees--seems to be determined differently. For starters, tuition fees change but once a year, not constantly. Universities are like restaurants, with "menus" giving prices for a variety of different offerings, with the menu changing once a year. For many schools, however, the listed price is not what economists call an "equilibrium" price--a price equating quantity demanded with quantity supplied. Rather, thousands are turned away at the listed price at selective admission universities. Also, massive price discrimination exists, so many customers--often a majority--pay less than the stated or sticker price.
Amidst all of this, schools typically charge students the same regardless of their major. A committee advising Florida Governor Rick Scott has recommended a move to differential pricing--majors would pay differing amounts. The goal is partly to entice students into the STEM disciplines (science, technology, engineering and math) on grounds that our future would be enhanced by having more scientists relative to, say, English majors or anthropologists. By making STEM tuition fees lower, we will encourage enrollment expansion in those fields. Ohio University's Board of Trustees recently considered (but did not yet adopt) a multiple-price approach, and other schools are doing so.
Aligning Costs and Benefits
I have mixed reactions to this proposal. Conceptually, it is a good idea. Within universities, on the supply side, the cost of educating say, mechanical engineers, is probably a good deal different (I would surmise more) than educating English or history majors. From the consumer perspective, the demand for engineering majors often exceeds that for English majors. Differential tuition pricing potentially could more closely align the amount students pay to the costs and benefits of various degrees.
For example, if we have underutilized anthropology professors, the cost of educating one additional anthropology major may be close to zero--existing faculty could handle the job. If we have accounting professors working at capacity, the extra cost of adding another major or two might be very high--requiring more faculty. Having lower prices for anthropology majors and higher prices for accounting majors might lead to a better, more efficient utilization of university resources.
Despite claimed altruistic motivation, the current approach of charging different students varying amount for the same services is probably as much an attempt at revenue maximization; in economics jargon, each individuals has his or her own demand curve, so the "equilibrium" price varies by individual. This is the same approach used by airlines--charge price-sensitive tourists buying their tickets well in advance far less than price-insensitive business persons flying on short notice. The airlines collect more revenue, planes fly at near capacity, and resources are more efficiently used.
Out-of-State Students Pay More
Moreover, differential tuition pricing is already practiced in other ways that make some sense. At public schools, since state subsidies for out-of-state students are vastly lower than for in-state students, a higher tuition fee is typically charged the out-of-state students. Expensive programs such as aviation flight instruction or individual tutorial training in, say, piano, are often financed in part by special additional fees.
The move to differential pricing by major subject is a move back towards the Oxford University model of around 1700, discussed famously by Adam Smith. Each professor charged tuition fees as he saw fit. Popular teachers might charge more than less popular ones. The professor collected the fees, not the university, and Smith thought the quality of instruction declined when that practice ended, because professor salaries were less aligned to performance and student demand.
Yet differential fees also can present problems. For example, an assumption in the Florida proposal is that graduates in the STEM disciplines would promote economic growth more than other graduates. If STEM graduates were super-productive, this should be reflected in their receiving higher salaries than virtually all other occupations. That is not always true. Philip Coelho and Tung Liu in a recent paper, for example, suggest mid-career graduates who majored in biology make less than those majoring in economics or philosophy. Moreover, relying on demand/supply considerations would probably typically lead to higher, not lower fees in STEM disciplines. Politicians or university bureaucrats setting tuition levels to favor trendy or politically favored areas could turn out to be a disaster from an efficiency standpoint.
Differential tuition introduces a host of logistical and administrative issues. Students are constantly changing majors. Could a student largely avoid higher fees by staying in a low tuition major until late in his/her college career, than switch into the high priced major at the end? Charging differential tuition by course (the Oxford model) could deal with this, but then there is a serious information cost problem--but how can high school seniors and their parents compare tuition fees between two schools like Michigan State and Indiana University when the fees vary widely within the two institutions? For any given 100 freshman, there may be 100 different tuition fees. Differential fees could well impede legitimate, desirable academic mobility -migration between majors. Administrators of high-priced major A may put up barriers to keep kids in low-priced major B from taking their courses--almost like nations imposing tariffs on other nation's goods. These problems are solvable, but they do exist.
Bottom line: differential tuition is a promising innovation, but poorly done it could lead to worse outcomes than at the present. The devil is in the details.
Richard Vedder teaches economics at Ohio University, directs the Center for College Affordability and Productivity, and is an Adjunct Scholar at the American Enterprise
(Photo: Florida Governor Rick Scott via Tampa Bay Times)