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income-distribution effects of a pricing scheme

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In the face of stable (or declining) enrollments and increasing costs, many colleges and universities, both public and private, have found themselves in progressively tighter financial dilemmas. This has led to a basic reexamination of the pricing schemes used by institutions of higher learning. One proposal advocated by the Committee for Economic Development (CED) and others has been for the use of more nearly full-cost pricing of higher education, combined with the government provision of sufficient loan funds to students who would not otherwise have access to reasonable loan terms in private markets. Advocates of such proposals argue that the private of return to student investors is sufficiently high to stimulate socially optimal levels of demand for education, even with the higher tuition rates. Others have argued against the existence of significant external benefits to undergraduate education to warrant the current high levels of public support.

As with current university pricing schemes, proponents of full-cost pricing generally argue for a standard fee (albeit higher than at present) for all students. Standard-fee proposals ignore relative cost and demand differences among activities in the university.

a. Discuss several possible rationales for charging different prices for different courses of study.
b. What are the income-distribution effects of a pricing scheme that charges the same fee to all students?
c. If universities adopted a system of full-cost (or marginal cost) pricing for various courses, what would you expect the impact on the efficiency of resource allocations within the university to be?
d. Would you complain less about large lecture sections taught by graduate students if these were priced significantly lower than small seminars taught by outstanding scholars?
e. What problems could you see arising from a university that adopted such a pricing scheme?

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Solution Summary

Rationales for charging different prices for different courses of study are presented.