In the Higher Education Supplement this morning, Griffith University economist Ross Guest considers what should be done with ‘economic rents’ that prestigious universities can extract by charging high fees. Rather than imposing price control as the Bradley committee suggests, Guest says that:
The efficient way of dealing with economic rents is to tax them; this is how we deal with resource rents earned by mining companies, for example. So why not tax any excessive economic rents earned by institutions and use the tax revenue to offer means-tested subsidies to students?
I think it is pretty clear that some universities charge fees for full-fee students that are well in excess of the cost of delivering the course. In my submission to the Bradley review (table 6) I showed that sandstone universities charge international students $6,000 to $10,000 a year more than Dawkins universities for similar courses. Some of that is probably genuine quality differences – better academics and facilities. But I think we can assume that there is some ‘economic rent’ here.
There seem to be three broad options:
1) Under the price capping system favoured by Bradley, the student gets the prestige value of the degree. Because the price to students is the same whether they attend a high or low-prestige institution, those attending high-prestige institutions get something that the market deems to be of higher value than its nominally equivalent courses elsewhere. Though there is no empirical evidence to prove it, possibly students get better jobs or higher pay if they go to high-prestige institutions (for example, some employers only send recruiters to high-prestige universities). They almost certainly get access to higher quality social networking opportunities, which can also lead to better jobs and other positive outcomes. Plus there is the social cachet and snob value from attending a high-prestige university. (1) seems to be quite a regressive way of dealing with the economic rent issue.
2) In current deregulated markets, the university captures the rent. But what do they do with this money? There is no reason to disbelieve their public statements that they spend teaching revenue on research. Research is what academics most want to do, and it is the main source of university prestige. In an indirect way, it means that students who pay the rents via their fees are in fact getting what they paid for. Their money helps maintain the prestige that motivated them to attend the university in the first place. Assuming that university research has some public value as well, this could be preferable to funding research from tax dollars.
3) In the Guest proposal, universities charge the economic rents, which are then taxed to provide the revenue for means-tested subsidies to other students. Now this is definitely worse for the students paying the economic rents, because money spent in this way does not enhance university prestige. And subsidies for people from low-income backgrounds may attract people with inferior social networks, diminishing another advantage of attending a high-prestige university.
But is (3) better overall? There is little evidence that, with an income-contingent loan scheme, people of limited current means are more price sensitive than those with greater family wealth. So the practical effect of (3) may be to deliver windfall gains to people who are in fact on the much the same earnings trajectory as those paying the economic rents. Unlike (2), which may generate public benefit via research, (3) may be just an income and wealth transfer between different groups of students.
Overall, then, (2) seems to be the least regressive of the three options, and the most likely to generate public benefits.