Over at the Bet on It Substack, Bryan Caplan raises a good point about state tuition bills. State colleges often charge a third of what private colleges charge. That suggests that state colleges are leaving a ton of money on the table. Here is Bryan:
What do we learn from the tuition disparity? How could this massive price gap emerge and endure?
It’s tempting to just blame “monopoly power.” But there are many competing public universities at virtually all levels of selectivity. (Exception: There are zero public schools in the top ten). Not only would collusion be hard to orchestrate, but treatment of non-resident students varies considerably from state to state. If out-of-state students were really being charged prices far above cost, you’d expect each state to try to “steal” as many as possible from competing states.
The straightforward explanation for the persistence of the massive price gap is that only in-state students are massively subsidized by their state governments. So instead of picturing out-of-state tuition as a “monopoly price,” we should think of out-of-state tuition as the roughly competitive price.
Bryan then goes into a number of explanations but ends up puzzled at the extent of the price gap: “Due to product differentiation, perhaps schools could durably hold out-of-state tuition at 20% above cost. Maybe even 50%. But 200%?!”
I don’t have a complete solution, but I offer a few thoughts:
First, many public schools were land grant schools created in an age where the demand for college was much lower. Thus, the initial model was for many public schools to be free or be nearly free and states actually provided it. For example, the University of California famously began as a tuition free school. So, states massively subsidized a relatively low demand product (e.g., in 1900, only 1% of students enrolled in college) and they were able to make it happen with relatively cheap donations (land and a yearly grant from the state capital). As Bryan suggests, public higher ed actually was a very socialized industry from the get-go.
Second, incentives. Let’s assume Bryan is correct and that out of state tuition is the actual competitive price. What keeps in-state tuition so low? I think path dependence is a nice candidate. Universities don’t have a class of owners or investors who would immediately benefit from a tuition raise. I’ll deal with administrators as a second point below, but profs, students, nor staff have a great incentive to recoup lost profits via tuition increases. Of course, state legislatures have an incentive to put a brake on super big tuition increases to appease constituents.
Third, administrative incentives. The only group that seems to be in favor of tuition increases are administrators. Of course, their own salaries (including my own!) are boosted with tuition dollars but they also need tuition dollars in order to solve a pile of problems - faculty raids, maintaining facilities, paying for student services, etc. Unless they want universities to crumble or shrink, they need new sources of income. The big downside for administrators is occasional student protest. In other words, administrators suck up the personal price of hiking tuition - that’s how we get non-zero prices in this model.
Fourth, out-group bias. No one cries for foreigners. This is especially true in college tuition. We can charge them quite as much as they’ll pay. My own university charges $11k for in state, $40k for out of state and international. I have yet to see a single op-ed, protest, or other commentary on this fact.
The model is that emerges is then something like this:
Universities started out as a very socialized institution.
Universities departed from this model - but very, very slowly due to the public choice issues noted above.
Universities deal with two markets, but one is relatively unconstrained and the other is super constrained.
Bottom line: Universities exist in a complex world of politics and consumers, which yields very split results.
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