What do higher education subsidies achieve?

This year, the federal goverment has budgeted to spend around $4 billion subsidising higher education tuition. Strangely, though most people in higher education politics think we should spend more than this, nobody seems quite sure what this expenditure is supposed to achieve. The Bradley report confessed that ‘there is no easy basis on which to determine the “right” mix of public and private contributions’. This was not just an empirical problem; it was a conceptual problem too.

The most defensible theory of higher education subsidies is that by fiddling with prices via subsidies demand for education is increased to socially desirable levels and/or supply is increased by making it more attractive for higher education providers to offer disciplines that might otherwise be under-supplied.

Behind this theory is an argument about externalities. In comments over the weekend, commenter Rajat Sood suggested that the widely varying share that Commonwealth subsidies make of per student funding, from as little as 16% for law to more than 80% for science, may reflect (at least approximately) the ‘social externalities’ involved. The idea here is that because not all the benefits of higher education are captured by the student, in a pure market they won’t pay the prices set and higher education will be ‘under-produced’.

But this theory does not fit with current system design. Under the quota system, suppliers do not receive price signals, so they cannot respond to extra demand or provide extra supply. Under a voucher scheme, they would receive price signals. But as my Issue Analysis paper argued the effect of the combined subsidy-price cap system recommended by Bradley would mean that suppliers would receive price signals that would encourage them to reduce supply below what a pure market would provide. So the effect of Commonwealth fiddling with prices would be the opposite of what the externalities theory says it should be.
Continue reading “What do higher education subsidies achieve?”