The price is wrong?

The rise in university tuition fees is supposedly to allow the cost of education to be spread more fairly. The fact that someone has a degree means they can earn more. So the government reason that a student should repay part of the cost of the education which allowed them a higher income.

Most feel that the real reason is to reduce public expenditure, although it does provide universities with a higher net income and this allows them to spend more on their students education.

The problem is that the higher fees put people off from applying to university. They don't understand the full benefits higher education will give them and so see the expenditure as greater than the benefit. This occurs because education is an imperfect information good.

Education is also referred to as a merit good. The market will provide education, but less than the socially optimal amount.

The BBC reports the decline in UCAS applications for the second year running. You can search the blog to find earlier posts on this issue.

The BBC article is here

University applications down, but is that a sensible response?

You will not need reminding that university tuition fees rise to at least £6000 next academic year. The predictable response is a fall in demand.

Applications are down by 8.7% overall. This is what we would expect from the law of demand, price up, quantity down. And in terms of price elasticity demand that's pretty inelastic as the price change, at least on the surface, is at least 100% and in the 'better' universities 200%.

But should students turn away from a university education? The problem with education is that it is an imperfect information good. Consumers of education will not consider two aspects of university education:
1. The benefit to society generally of having a better educated workforce.
2. The full benefits to themselves of attending university.

Potential university students only consider the benefit they believe they will get and weigh them against the cost of attending university. However students rarely realise at the time how much extra income a degree brings them. Nor do they consider their increased productivity and the benefit to the countries productive capacity.

Overall this means that consumers by less education than is allocatively efficient. This is an argument for subsidising education not raising the costs. Indeed some of us got paid to go to university, but maybe I will stop at that!

The Independent covers the application figures here

Discrimination is not always conscious

The difference between the pay and job opportunities for different groups in society is not easy to explain. Despite legislation dating back to 1970 and numerous Act's since men are still payed more than women, whites more than black and those from the middle class get more than those from working class. The difference in unemployment rates are similar.

One way to overcome this is to allow free access to higher education and select those who can access this opportunity on the basis of academic ability and not the ability to pay. Then at least everyone has the chance to present qualifications to potential employers that makes their worth clear, regardless of race, gender or background.

The first indications of university applications this year, with the new higher fees, show a substantial drop. This is probably inevitable (straightforward law of demand), but has wider issues.

The drop in applications from women is roughly double that of men. This may reflect the, very old fashioned view, that education benefits women less than men as women will become 'homemakers' and so it is not worth spending as much on them. While this seems strange to us it was the received view up to the 1960's.

But the damage that will be done to Britain's long term productive capacity and competitive position, by a less well educated workforce, is the most worrying aspect of this data. In a knowledge based economy, as Britain's future economy must be, this move is akin to cutting off an arm in an attempt to lose weight. Effective in reducing short-term expenditure, but plain stupid as a strategy.

The problem of education is that it is an imperfect information good, people don't understand how good education is for them and how much their education benefits society as a whole. Education is a merit good therefore, the market will never provide the socially optimal amount and it needs to be encouraged by the government.

Notice in The Independent report below that overseas applications are up. Britain is a relatively cheap place to study in international terms and this has been enhanced by the fall in the value of the pound over the last two or three years.

The Independent story is here