A Viable Solution to Tuition Increases

The article titled, “To Lower College Tuition, Obama Should Focus on Supply and Demand” covers an interesting but simple solution. College tuition has been inflating over the years throughout the nation. President Obama has addressed this issue in some of his speeches at college campuses by threatening schools that if their tuition does not stop increasing, then taxpayer funding will go down. Though this position is likely just political gobbledygook to win support of college students and parents, there is a more practical solution to the issue. The solution involves supply and demand. Demand has grown for a college education. Some explanation of the demand growth can be found in population increases, increased foreign enrollment, and an under par economy with added financial aid. Supply of freshman slots available on campus has not kept up with the growth of demand. This lack of supply results in a shortage, which results in price increases. The solution is to expand the supply of freshman slots on campus. If President Obama or any other politician really wants to stop tuition increases, then they should put pressure on schools to increase the supply of freshman enrollment slots.


Jake said...

I think that a greater supply of students could be part of the solution to slow the tuition increases. Though I like the idea, I have a concern. Unless there is a surplus of students just waiting to get into the universities in the United States, how would the universities fill those spots so that revenue could increase with increased enrollment? One way I see how enrollment could be increased, or the supply be increased, would be to increase the marketing budget to allow for more advertising. Hopefully the benefits from the increase in advertising would be greater than the costs of the larger budget. I think that this could be done, but I am open to more ideas.

Zach said...
This comment has been removed by the author.
Zach said...

I think that sometime within the next 5-10 years we might see a large decrease in enrollment. The job market is flooded with degree holding workers and according to recent news half of college students can't get a job after graduation. The supply of graduates is double that of the demand. So not only is tuition rising, jobs are decreasing. Economics would also assume that salaries are decreasing.
Students are going to get frustrated with the promise of getting a higher paying job by going to college gone. People will stop spending their money on something that doesn't pay off in the long run. I know many people who have thousands of dollars of student debt and have no job to pay for it.

Dave Tufte said...

Jon: 100/100
Jake: 50/50
Zach: 50/50

My response to this is so long that I had to break it into two comments.

I think this post is exemplary; blogging in class is a good idea if it gets students to put ideas out in the open ... even if they're not very sound ones.

Sorry if that sounds harsh :) But my point is that perhaps I can steer the suggestion in a better direction.

Who pays tuition? At first glance, this is the student, and perhaps their family. But, this isn't quite right. Even though students complain extravagantly about the costs of college, the fact is that for most of them the government is picking up most of the tab - either through subsidies to state schools, or guarantees of loans that banks wouldn't otherwise make. Even middling private schools charge undergraduates $30-50K per year. If you went to a public school, this provides a good estimate of the true cost of your education. Perhaps you paid far less, but someone picked up the difference. This is where demand is coming from (note that Jake has it backwards).

Digression: students are often shocked by this. SUU's numbers are public information though. In 2010-11, it cost $107,000,000 to run SUU, and that's just its current account. Those costs were for just over 8,000 students. That's about $13K per student. Very few undergraduates pay even half of that out of pocket. But ... a bunch of you are MAcct students. And you folks know that the capital account is a huge, but lumpy expense, for an enterprise like SUU. And it's all picked up by the state, and not shown in that #13K at all. Private colleges amortize their capital costs to incorporate them into tuition, which is where they get the $30-50K figure for tuition. The bottom line is that an SUU undergraduate paying a full ride out of pocket is probably buying an education at a 75% discount of the list price. Yowza!

Returning to the main argument, let's think about equilibrium. What we've seen over the last 2-3 generations in the U.S. is both an increase in the (relative) price of college education and the (relative) quantity purchased as well. This tells us that, while demand and supply may have both shifted repeatedly, the dominant feature is shifts of demand to the right (causing a move along supply upwards and to the right).

Yet, as Zach points out in the comments, it isn't clear that the students are getting as much benefit out of this as they should. I'm not convinced of that, but let's take that at face value. How is it possible that demand can be shifting to the right, when the students aren't motivating that shift?

The answer is that university education in the U.S. has become a huge welfare program: people (students) are being provided with something of value (education) that they don't have to pay full price for. This is the core reason that college has become "expensive".

Dave Tufte said...

Part 2

Returning to Jon's post and the source article, I have no doubt that increasing freshman slots (shifting supply to the right) would help lower prices. But, my point is this is a secondary, and reactionary, response to the primary problem. We could just as easily get to the same point by not subsidizing the purchase of college eduction to the extent that we do.

Before you say that this is harsh, consider this alternative. What if we took some of the money that is being, perhaps indirectly, pushed on demanders, and gave it to suppliers to build new buildings, new campuses, and so on. This would have the effect that Jon wants: to lower prices. And it would have the effect the public seems to want too: more enrollments.

Now, let me really commit a heresy and tell you why this doesn't happen. It's because the primary beneficiary of subsidizing demand is not the demanders (this is Zach's point) but suppliers. Think about it: wouldn't Wal-Mart be the biggest promoter of a government project to make it easier for people to shop at ... Wal-Mart? Well, this is exactly what colleges are doing. And, it's a heresy for me to point this out because one of the biggest subgroups to benefit from this is ... professors.

One final side point: Zach notes that many graduates don't get jobs. But, we all know what majors are most likely to have that problem. Again, note that the subsidization we make to demand doesn't question the major the student chooses. So, we're making it easier for students to take majors that aren't as likely to lead to jobs. This is crazy if you think about it.

I hope I've been able to retain your attention to the end of this long comment. And I hope I've sparked some ideas in you folks.

But for me, what is most striking about this, is that 3 students have written stuff on this topic that has bought into a line of argument that misses on the basic economics. It's good to get this out into the open. But what does it say about our society and our level of discourse on public policy that no one else noticed?

Dave Tufte said...

Oops ... I have a # in one spot where I should have an $.

Jon said...

I am surprised that the huge subsidization of college tuition did not come to mind when I was writing my first post on the topic. I remember learning and even being quizzed on the amount of the subsidization that students at SUU receive in one of my earlier economics classes. It is also surprising to me that the source article did not mention the issue of subsidization.

Regarding Zach’s comment, I like Dr. Tufte’s point. I do not like to think about the possibility of all my time, money, and effort put forth into obtaining a degree as being a waste. That’s because with the major I have chosen I expect to get a good job. But with some majors on campus, it may be more difficult.

Dave Tufte said...

You're fine! Remember I said that the blog is not judgmental on the economics.

Your behavior is broadly related to the survey evidence that a majority of people are against welfare payments, but in favor of the particular welfare payment they receive.

Gosh I hope your efforts are rewarded with a better job. My experience with our MBA graduates is that they get better jobs if they're willing to move away from southern Utah.

Dave Tufte said...

BTW: 50/50 Jon.