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November 26, 2012

Should We Charge Different Fees for Different Majors?

Rick Scott.jpg

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)



Comments (3)

Dismalist:

Thank you for your thoughtful discussion.

What colleges currently do is "bundling": tuition gets you an English or Physics major plus a football team plus a melange of victimization movements. This is prima facie evidence of monopoly power. Enhanced competition would break this up. The key to that lies with the Feds and the accreditation cartel.

As for Florida specifically, they got it the wrong way around: They have no clue where the future lies, just as I don't, so for efficiency they should charge tuition proportional to cost. An xxx Studies major may have small market value, but s/he costs little to produce. Those guys swirling tiny particles may have a high income over their lifespan, but their educational toys are very, very expensive!

Somebody gotta pay for the machines.

David R.:

This is a disappointing analysis of a completely unworkable idea. I suspect that Professor Vedder is not so blase about the ability of government bureaucracies to solve predictable and complex problems in other contexts.

First note that the governor plans to impose lower tuition for students who major in chemistry as compared to students who major in English. In reality, of course, chemistry teachers are paid more than English teachers and require expensive labs and equipment. Vedder very vaguely discusses the ways in which differential pricing could make sense in a theoretical model, but the actual case we have in front of us shows how politicians are completely unable to implement this idealized model and are in fact proposing one which would raise, not lower, costs.

How would differential tuition rates be decided in reality, as opposed to in the models which Vedder can imagine in his office? Should individual academic disciplines heavily lobby state legislators to argue for the value of their subject? Perhaps each year (every five years?) there could be a massive study for each institution which purported to show salaries for every discipline (five years out? twenty years out?) Who would do these studies and why should salary alone be the criterion (benefits? leisure time? respect from society?)

Disciplines would splinter since political scientists who focus on international relations would have different outcomes and so different tuition rates than those who do political theory or American politics. Depending on the incentives, one could also imagine disciplines only admitting to the major the very best students, and in general penalizing teachers who take on students who face challenges or are just less able.

If biology students paid less we can expect a whole set of courses in "biology" which require no math and involve a lot of material we would have previous seen in social sciences and humanities. To prevent this the state legislature would have to define what biology is--is that desirable or likely to lead to a good outcome?

Right now students major in what they are good at. If a student who excels in philosophy is lured by money to be mediocre in chemistry, has society benefited?

Any attempt to institute a differential tuition system will require state legislatures to take on a task they are unable to perform and will lead the traditional disciplinary arrangements of universities to be convulsed in response to the arbitrary and unprincipled regulations that the legislature comes up with. If Professor Vedder wants to be successful in bringing radical change to the university, he needs to be willing to tell his political allies sometimes that their ideas are bad.

FC:

" If a student who excels in philosophy is lured by money to be mediocre in chemistry, has society benefited?"

Yeah, probably. The student probably has too.

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