Who should receive university economic rents?

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.

22 thoughts on “Who should receive university economic rents?

  1. Deakin: $18,000.
    Climbing the prestige scale based on my prejudices and your measure. Was it done using research or by offering interesting courses and delivery options? Still below the “sandstone” set in cost but above the Dawkins set you provided ( I think you would be hard pressed to argue Deakin didn’t come out of the Dawkins reforms).

    Monash$24,000. In my view replaced Melbourne as the preferred university for career based degrees long ago, and did so by offering better courses not by research. Your measure has them on equal footing. Doesn’t belong to the sandstone or he Dawkin set.

    There is more to it, why for instance does Monash charge more than Sydney, and Deakin more than Latrobe.

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  2. Some of the price differentials (and pricing for that matter) seem to occur for reasons unknown to me. There are a few postgraduate courses I know of where you could probably charge twice as much and still fill with reasonable students (It would be interesting to know what the upper limit on medicine at most places would be, for example, although there are a few other courses I can think of in this position too), but these prices are not charged.

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  3. I don’t agree with Ross that these payments represent an ‘economic rent’. They are a return on investment in reputation. The sandstone universities have ling invested over a period of time in their reputations and they recover that investment by increasing their fees. This is a point the Bradley Review completely missed. It goes to the relationship between teaching and research. Research doesn’t always feed directly into teaching, but it does enhance reputation that allows universities to attract better students and charge higher fees. Without understanding that relationship it is easy for people to argue that attracting research grants makes the university go broke.

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  4. Sinc – People like Chapman argue that these research reputations are the results of many decades of taxpayer investment, and therefore the taxpayer should take the rent. To the extent this is true, I am inclined to think that the ‘rent’ can be taken in lower subsidies for research.

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  5. “To the extent this is true”
    .
    It’s not clear to me to what extent this is true. The big research universities these days take a comparatively small (and declining) proportion of their funds from the government. In addition, there are universities that are relatively new but have reasonable research profiles (e.g., Monash), who have therefore not taken nearly as much money, and ones that are relatively old that have taken piles of money over time (e.g., all the old institutes that were promoted to universities), who haven’t been able to develop research profiles despite the money. This second one is true even just considering the last few decades since they were promoted. Thus it is not apriori the case that the funds the government gave out were enough to generate large amounts of good research, which suggests places like Monash were either massively more efficient about resource allocation (seems unlikely), or they were just better at getting other money to do research.
    .
    I guess the other issue is that if universities arn’t taking piles of money from the government now, it doesn’t seem reasonable to hold them liable for things that were given to them with no long-term strings attached in the often far distant past. The same sort of logic could be used for things like unemployment benefits — we don’t ask them to be repaid in a few decades time, even if the previously unemployed becomes rich.

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  6. Chapman is from the ANU where that statement is entirely true. But for non-ANU universities research has only been partly subsidised by government and only for part of their existence.

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  7. And subsidies for people from low-income backgrounds may attract people with inferior social networks, diminishing another advantage of attending a high-prestige university.

    Who needs fences when you’ve got prices, eh?

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  8. The ability to pay a price is a quality signal.

    (The same logic applies to accepting refugees who can pay people smugglers to get here, rather than those who sit in UN camps waiting to be relocated at government expense.)

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  9. Sure price and exclusivity are quality signals. I have no problem with that for luxury cars, designer clothes and fancy clubs. But I haven’t heard many proclaiming that we should be making exclusivity a feature of higher ed.
    Normally I can see some form of equity logic in Andrew’s free market solutions (allow people to invest in their own education), but that sort of approach would place exclusivity at the heart of a deregulated higher-ed market. On that logic, why not do away with equity scholarships too?

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  10. With income-contingent loans, people from poor backgrounds can still decide to pay the full fee. Indeed, it may make more sense for them to do it than for people from affluent backgrounds, who are likely to already have good social networks from their friends and family. And the students who are ambitious enough to want to pay the fee are probably good long-term networking value. Cutting the fee, however, attracts people who do not place high value on university prestige or are not committed to employment that will generate sufficient returns to finance high fees (ie employment with network value).

    However, my argument does not turn on this point. We don’t know very much about what drives student price sensitivity. But we do know that research drives prestige, and that high fees are helping to finance that research.

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  11. Assuming that it is the prestigious universities that do the most research, isn’t allowing (high) fees to displace public research funding akin to taxing the prestigious universities anyway? If the reduced public research funding goes to income-support for poorer students, don’t the differences between proposals (2) and (3) collapse?

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  12. Jeremy – Guest’s article is MOSTLY excellent, but his response to Bradley’s claim that eminent universities can abuse their “quasi-monopoly” power to sharply increase fees and deliver considerable economic rents is wrongheaded. Bradley’s description of economic rent is confusing. Rather than proposing to tax something that probably isn’t economic rent, he should have pointed out the confusion in Bradley’s arguement.
    Further, if he was serious about imposing a University Rent Tax, he might like to consider how government would measure economic rent in a meaningful way so they can assess the universities’ tax liability.

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  13. Hi Johno.

    I thought what Guest was saying was ‘well, if there are rents in the system, then just tax them’, which struck me as being sensible.

    But unfortunately I haven’t read Bradley’s account, so his treatment of rents was an unknown unknown to me – I didn’t know what I didn’t know!

    But like you and Sinclair I doubt that there are any pure rents in the system, rather they are likely to be quasi-rents accruing as returns on investments in prestige. And the good thing about quasi-rents is that, were other universities also to invest in prestige, any quasi-rents would likely be competed away.

    So the answer to this claimed inequity isn’t for new universities to demand a tax which brings all universities down to their level, but for them to invest so as to raise themselves to the level of the older universities.

    As to who made the investments, the people arguing above know much more about it than me, so I’ll keep silent and listen.

    And I agree: I too would be interested to see how the rent tax advocates go about measuring those supposed rents. Mind you, I wouldn’t take their word as final.

    But I’m very glad that, finally, Andrew is being joined by other sensible voices in the discussion of university funding.

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  14. Sinc, I meant that if the government withdraws research money as prestigious universities raise fees, this is like setting an effective marginal tax rate on the increased fees.

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  15. Sorry. Yes. Don’t know that the government would do that. As much as I think government sponsored research is (mostly) a waste of taxpayer money, I don’t think I’ll ever convince policy makers on that point. So government will always fund some university research and I wouldn’t recommend reducing it as student fees rise.

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  16. Arguably, universities do it to themselves. For example, the Australian Research Council maintains the success rate for grant applications by giving successful grants a lower % of the (ostensible) costs of the project. This causes universities to call for ‘full’ funding of research. But nobody forces them to apply for grants or to accept them if offered (indeed, one WA academic did reject his ‘underfunded’ offer). This is not like student places, which universities are forced to take. Would policymakers increase funding if grants were rejected by universities? Or are they assuming that universities will use fee revenue to pay for research, and therefore there is no need to increase research funding?

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  17. Charles – Apologies that your comments with links were caught in moderation. Normally I get an email alerting me to this.

    Deakin pre-dates the Dawkins reforms by more than a decade, but it is an interesting counter-example to the university rent thesis, or at least suggests that it is very hard to calculate what that rent is. Deakin has only a 30 year history and modest research output, but can still charge good prices (from its perspective).

    Monash does not have any sandstone, but it is a well-established research university.

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  18. Andrew – thanks for the info on Deakin, I knew it had came from Gordon but had wondered why it went straight to university missing “Collage of advanced education”.

    I actually think it has a lot to do with market size. and believe research as the driving variable is overrated. Research is supported by the lecturers and justified in anyway possible. It is a lot more interesting than teaching. Lets be honest university lectures love learning, that is why many of them are there and they a bright enough to justify their love (with research if need be).

    In my view Ballarat struggles because of market size ($13,000).
    Victoria struggles because it is competing against well established institutions.
    Why does Latrobe struggle, while Monash has done so well?
    And RMIT, just keeps on keeping on, gaining university status in 1992, well after the Dawkin reforms, with a prestige quotient then and now, well above most Universities, Dawkin or otherwise.

    As an example of the issues, I had an Indian friend who wanted to send his daughter to Australia for education (it happened to be for a commerce degree), Melborne alone was being considered, they come from a place where streets with no people is a very strange concept. I wonder if that is a primary variable feeding into market size. And if I bring it back to topic, if that is the case, who should get the money for providing the crowded streets.

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