Let students decide how much their education is worth

The UK’s public sector financial crisis is putting university tuition fee deregulation on the political agenda there in a way that it is not here. The Browne review of higher education funding, set up by the previous Labour government, is widely expected to recommend at least some deregulation of tuition fees.

This has of course set off the usual worries about affordability and access. In this context a survey of how much existing students are willing to pay by the Opinionpanel organisation is particularly interesting. It asks two questions, one about what price the student would think so cheap that they would doubt the course’s quality, and another about what price would be so expensive that they would not consider paying it at all. They respond by dragging a marker on their computer screen in £100 increments.



As the report notes, rejection levels are similar at £2,000 and £4,000 a year (currently the maximum is £3,000), so it makes more sense for unis to charge the higher amount.

It finds that low SES students (variously defined) are more price sensitive than other students, though only slightly so. They are similar up to about £4,000, but then low SES price resistance rises more steeply. (It should be noted that this survey is of actual students, so if there are unusually large numbers of particularly price-sensitive low SES student they are not in the sample). It is not clear whether the differents response is a ‘rational’ assessment of likely variations in earning trajectories, or higher SES students are just less put off by prices that sound high.

All the ways Opinionpanel cut their data – ability level, uni prestige, course, gender – shows differences in price sensitivity in the expected direction. More able students will pay more, students at high-prestige institutions will pay more, students in courses leading to high-income professions will pay more, and males will pay more. These correspond to known differences in actual earning potential (though I am not sure about uni prestige – I don’t recall seeing British research on this). However I thought some of the gaps would be wider than they are.

Arguments for fee deregulation are usually framed as being about university finances (because broke VCs have often been their main advocates) or fairness (governments looking for a justification for shifting the burden from taxpayers in general to richer-than-average students).

Surveys like this one highlight the microeconomic argument for fee deregulation. Students differ in their willingness and capacity to earn a return on their education, but government price control always sets maximum investment levels below optimal levels for those who believe they can earn high returns. It woud be very difficult for goverments to know who warrants higher levels of investment, and it would be politically impossible to make some of the distinctions even they did have a reasonable idea. By letting fee levels be set in the market, with individual students picking courses around their desired level of investment, we are likely to get more efficient human capital investment than occurs currently in the UK or Australia.

13 Responses to “Let students decide how much their education is worth

  • 1
    Russell
    June 2nd, 2010 20:06

    “It woud be very difficult for goverments to know who warrants higher levels of investment …..”
    .
    That’s one reason why it’s better to have free education and fund it by progressive income tax – those who have benefitted so much can pay more.

  • 2
    Andrew Norton
    June 2nd, 2010 20:17

    Russell – No, that’s one reason why free education isn’t a good idea. It means that the government – which knows nothing about individuals – makes one size fits all decisions.

    And with progressive income tax, they get the money regardless of whether or not that made any investment at all in the first place.

  • 3
    conrad
    June 3rd, 2010 05:09

    One thing this shows is that the place where the least number of students reject the fees is no doubt far below the cost of running most courses (3,100 pounds — about $5,000 dollars — approximately Band 1 in HECS terms), which means if you took the “least exclusionary” place to set fees (no doubt a good government argument), you would end up with a McDonalds system like Australia and like what most UK universities are or are fast becoming.
    .
    Another thing it shows is that people probably can’t answer these tasks correctly. Given that the male participation rate is far below females, if males are willing to pay more than females, it either means the smaller number of them that want to go are willing to pay more (seems unlikely) or that they are simply willing to give higher values when the money is not real (more likely if you consider this a “risk” task).

  • 4
    Andrew Norton
    June 3rd, 2010 05:35

    Conrad – The egaltarian argument would be to set prices at the point where nobody/hardly anybody is excluded. The market argument is that there should be – as there are in other service industries – prices along the range of prices people are willing to pay.

    The response of males is rational. On average they spend far more years in the workforce than women, and therefore their financial returns are higher.

    Some other observations:

    * while apparent intuitions about the present value of their investment are broadly in the right direction, little actual information is typically provided on this
    * they are being asked about the course they are doing now, rather than what they would pay for a better course if it was available
    * the current price is clearly framing the responses, and so in practice higher prices could probably become the norm once in place

  • 5
    Rajat Sood
    June 3rd, 2010 08:14

    Interesting post Andrew. Another thing that occurs to me and is related to the second and third bullets in your comment is that it is unclear what is being assumed about the prices of other (substitute) courses. Am I being asked my willingness to pay for my Melbourne Uni economics course assuming that the prices of other courses rise comparably or am I being asked my willingness to pay for my course while other courses’ prices are held constant? If economics at Melbourne became much more expensive in isolation, I might switch to arts at Melbourne or economics at Monash, etc.

  • 6
    conrad
    June 3rd, 2010 08:33

    Speaking of framing, there was a story on yahoo today here, which shows just how tiny the fees in Aus and the UK are (and hence how little people are willing to pay to have a good unviresity education in Aus — which is strangely enough the opposite pattern found compared to the US high school system, where I think far fewer kids go to private schools).

  • 7
    Andrew Norton
    June 3rd, 2010 08:45

    Rajat – Yes, the whole thing is a status quo exercise, where the students will know that virtually everyone else is paying £3,000. This survey shows a willingness to pay a brand premium, but presumably between roughly equivalent brands there may still be price competition.

    Conrad – From what I have read of the research on prices, the history of pricing for particular commodities has a big effect on what is perceived as fair or reasonable. Because fee paying has been the norm in the US, and very high fees in the top unis, the prices there are not seen to be as excessive as they would be elsewhere.

    There are also particular features of the US economy that make high fees more acceptable. They have a bigger gap between the pay typically earned by non-uni and uni educated people than other countries, which makes it more desirable to get a degree. Also, their income tax rates are lower than in many other countries, so graduates get to keep more of their earnings premium.

  • 8
    Lucky Pete
    June 3rd, 2010 21:43

    The exact wording would be important in this sort of survey.

    There is a stark difference between a course costing the student $100 (but the rest of its $5000 cost to produce being subsidised by government) versus a $200 course without extra money being put in by anyone.

    Does the survey participant understand “price” in this instance to mean their input or the entire cost to put on the course. If it’s not worded explicitly, some will interpret it one way, others will interpret it the other.

  • 9
    Andrew Norton
    June 4th, 2010 04:39

    LP – While cost of delivery matters to public policy, I’m not sure that it matters to this survey. Value to the consumer is independent of cost of production; it could be higher or lower.

  • 10
    caf
    June 4th, 2010 15:01

    But the very nature of the first question – “so cheap that they would doubt the course’s quality” – implies strongly that the cost to the consumer of the course is related to the cost of production.

  • 11
    Andrew Norton
    June 4th, 2010 15:12

    Yes, perhaps LP has a point. However in this case I would assume that given most students in the survey were being asked to value their current course, for which they typically pay £3,000 a year, they would assess the possible consequences of less money being available to support their education. Though they would not have a detailed understand of university costs (universities don’t have detailed understanding of university costs…) they could make approximate assessments of what it might mean for them to take a cheaper option.

  • 12
    Russell
    June 17th, 2010 11:12

    Andrew, as you probably don’t read The New Statesman I’ll just draw your attention to a despicable article on university fees in the latest issue. I think you’ll enjoy seeing it in a supposedly left-wing journal:

    http://www.newstatesman.com/economy/2010/06/universities-dartmouth

  • 13
    Andrew Norton
    June 17th, 2010 14:17

    Russell – While I disagree with some of the analysis, the basic thrust of the article is sensible. I’ve occasionally read The New Statesman. The book reviews are good even if the front section articles are often too left wing.