Who should set prices for full-fee students?

HECS architect Bruce Chapman has consistently opposed universities being free to set their own fees. An article published in this morning’s Australian Financial Review, co-authored by Chapman and ex-bureaucrat and now-consultant David Phillips, suggested that

there is a case to question whether publicly funded universities should be free to set whatever price they choose for this one group [ie full-fee] of Australian undergraduates.

They noted that it seemed to be ‘highly inequitable’ that full-fee and Commonwealth-supported students pay very different prices for the same course.

Chapman and Phillips go on:

As well, some universities have strong reputations as a result of over 100 years of public sector subsidies, and they don’t pay rent, both factors implying that allowing an uncapped [a reference to the proposed abolition of the 35% limit on Australian full-fee payers] number of full-fee paying students will deliver disproportionate benefits to a minority of universities with no corresponding implications for increased competition.

Chapman has been saying similar things for years. In this 2004 radio interview he remarked:

The basic problems are that the universities don’t pay rent so we don’t have a level playing field to begin with and also some institutions have had 150 years of public sector subsidies for their reputation. We are not starting here in a vacuum. … You basically are allowing, under this particular scheme, universities price discretion or the capacity to charge whatever they like, which has got very little to do with competition. The number of places is still restricted so there won’t be great competition coming from this. What there will be is the delivery of very large profits to some institutions from minority students.

In an article published in the Australian Economic Review in 2001 he elaborated slightly on his objection to ‘unfettered price setting’, noting that as well as not paying rent some universities have prime inner city real estate and that ‘playing field is not level’.

Unfortunately, Chapman has never explained at any length the logic of his position – not even in his recent book, which at US$145 certainly shows that there is no price control in the publishing industry. But let’s try to unpack the various points he seems to be making.

Unfairness to students

I agree that it is anomalous that students pay very different prices for the same course. But surely price control is as much the problem here as the solution. If the government didn’t set the prices of university courses for Commonwealth-supported students at below cost universities would not be so keen to enrol full-fee students, whether Australian or international.

And while the prices paid by full-fee students cannot be justified on grounds of fairness or marginal cost, the fact remains that people voluntarily pay them. These students must regard the value of the course as equal to or greater than the fees that they are paying. The fact that so many people are paying such fees – more than half in some courses, once international students are counted, is also evidence that the government has set the fee way below its actual market value.

Unfairness to other universities

That there can be a large gap between the marginal cost of a course and its market value raises interesting issues about who should capture the surplus. Chapman is worried that certain universities (ie the Group of Eight) would receive ‘disproportionate benefits’ because the potential surplus generated by their courses is higher than for other universities.

But what does Chapman think that these universities do with the money? This is not like a rigged commercial market where a favoured group gets to pocket profits for their private benefit. The Group of Eight do most of the nation’s university-based research which presumably is of some public benefit. I did notice when flipping through the University of Melbourne’s annual report that its expenditure on research exceeds its research income. Some of this would come from the university’s endowment, but a surplus from full-fee students probably funds part of it.

I suspect that what Chapman is trying to do is hold on to the Dawkins-era goal of universities being more equal – academics tend to be acutely status conscious. But given that the revealed preference of the fees students pay indicate that sandstone degrees are more valued than degrees from ‘Dawkins’ universities, fees cannot be increased across the board to Group of Eight levels. Price control means that some fee revenue is simply lost to the higher education system entirely.

Universities don’t pay rent

If universities don’t pay rent, they have a cost advantage compared to potential competitors. But this doesn’t fit into the rest of Chapman’s argument, in which he is complaining about over-charging rather than under-cutting, the competitive advantage that flows from having lower costs (unless this is just another version of the above argument; that he wants to deprive Group of Eight universities of surpluses that they might use for prestige-enhancing research). In any case, I don’t think there is evidence that sandstone universities have lower overall building-related costs, as older buildings have much higher maintenance costs than newer buildings.

Lack of competition

It’s true that there is too little competition in the domestic Australian market. But the remedy to this is surely not price control – it is removing the policies that limit competition (as the Budget reforms take some steps toward). In the full-fee market there is, however, price competition between universities and between full-fee and HECS places. The fact that only about 3% of Australian undergraduates are full-fee despite a large minority not getting their first preference course indicates that many prefer a cheaper option to their ideal option (though a larger proportion probably started in a full-fee place, then switched to a cheaper HECS place).

What to do with the gap between the price cap and the market value

As noted, students clearly put a higher value on the degrees offered by some universities than the government does through its price cap. Impliedly, Chapman’s view is that the difference should be captured by the students in price-controlled places as a private benefit, since he does not want to further entrench hierarchies among universities. But from his egalitarian perspective, doesn’t this create ‘unfairness’ among students? Everyone pays the same price wherever they go, but some get more in return, creating greater inequalities.

From an overall egalitarian perspective, it is better if students at the sandstones pay more. Some of the price premium is creamed off to finance research rather than teaching, but I don’t think that is necessarily a problem – the students are partly buying the reputation of the university, and research strength plays a large part in overall reputation. And it means that the sandstone students’ average lifetime earnings advantage over the Dawkins university students won’t be quite as large.

The practical realities of price control

Even if price control made sense in theory – and I don’t think Chapman provides any convincing argument that it does – what is it like in practice? Higher education hasn’t been like some other industries with price control, where economists try to set the right amount. There has never been any serious attempt to calculate the reasonable cost of providing a university place – just a series of political compromises that have left universities desperately short of money. Chapman seems to think that the people who have made a complete mess of price setting for Commonwealth-supported students should be trusted to set prices for full-fee students too.

I have a lot of respect for Chapman’s work in setting up the income-contigent loans scheme. But his ideas on prices are an intellectual muddle.

6 thoughts on “Who should set prices for full-fee students?

  1. Andrew, your link to Chapman’s book is erroneously a copy of your link to his AER paper.

    And regarding the substance of your argument, you are, of course, right. It is a pity that the same guff is given a forum – repeatedly – when it has so little substance to back it up (Chapman’s sort of guff, that is…)

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  2. Unless you accept Labor’s argument that an increase in full-fee places somehow leads to a reduction in Commonwealth-supported places, I can’t see how an economist, as an economist, could oppose the removal of a cap on full-fee places. As you indicate, the removal of caps creates an unambiguous increase in overall welfare.

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  3. I reckon that’s a really bizzarre argument that universities should compete “on a level playing field”. Why? It’s surely equity amongst users of the institutions, not the institutions themselves, that we are aiming at. If some uni has a natural advantage from its location, why is that a problem?

    That aside, Rajat has hit the nail on the head. It’s the political economy rather than straight economic questions that educational deregulationists studiously ignore. Which is ironic because public choice economics is usually seen as a right-wing thing.

    That’s why I’m strongly opposed to school voucher systems, for example – I think they’d initially be allocatively more efficient but the politics would eventually lead to disastrous underfunding of disadvantaged students.

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  4. “the politics would eventually lead to disastrous underfunding of disadvantaged students.”

    As opposed to what we have now? It’s hard to see how things could get worse for these people.

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