It is quite plausible that there are public benefits from higher education on top of the private benefits accruing to graduates themselves. And there is an at least theoretically plausible argument that, in some cases, these public (and private) benefits may be under-produced if higher education was simply left to the market. This is a conventional market failure argument used to justify public subsidy of higher education.
But is it the case that taxpayers should fund public benefits even if there is no market failure? That seems to be the claim made in the Universities Australia submission to the higher education funding review. They tell us that:
McMahon [an American academic] concludes that the value of external benefits (excluding equity funding which is separate) to wider society beyond those appropriated privately through education by the former students themselves ranges from a lower bound estimate of public benefit of 37% to an upper bound estimate of 61% as a share of the total returns to education. Fifty per cent is close to the midpoint estimate. Universities Australia believes this can serve as a reasonable benchmark for discussion of the public: private benefit shares of higher education.
Later in the submission they call for this to be the basis for public funding:
A national aspirational target of 2% of GDP for higher education, funded 50:50 public and private, properly indexed and funded on a full cost of delivery basis, will create the necessary framework to deliver on the promise available from this investment.
In assessing whether there is a market failure the specific mix of public and private benefit actually isn’t that important. Provided the private benefit is high enough to prompt individuals to take higher education courses then there is no market failure.
We already have many cases in which public subsidy is well below 50% (law and business courses) or only loan subsidies (many domestic postgraduates and students at private higher education institutions) or none at all (international students, full-fee domestics paying up-front). It’s not obvious what we would gain in additional public benefits by handing them a subsidy for doing what they are doing anyway.
The UA argument (or implied argument, since no reasons are actually given) seems to be that society should not free ride on graduates. But why not? The subsidy argument seems to be that graduates should capture not just the private benefits of their higher education, but also the public benefits through cash compensation. That’s taking us a long way from the original market failure argument, that some additional private benefits (via tuition and/or loan subsidies) are needed to encourage production of public benefits that will be shared across society.
Even if we accepted UA’s logic, I am not sure that their submission makes sense. They seem to think that a 50:50 public:private split would increase public funding. But for government supported places the overall current public:private ratio is more like 60:40 on direct tuition costs, and around 67:33 if the costs of HELP are factored in. So on a 50:50 split the public is already paying too much for its public benefits, and we should have a substantial increase in student fees. Yet elsewhere UA says that student fees should not increase on average.
If the ratio was fixed at 50:50, it would also mean that any increase in government funding would need to be matched by an incease in private funding to maintain the ratio.
Perhaps the funding review panel will have more success than I did in extracting a coherent argument from UA’s submission. But I think it more likely that they won’t find much there that will help them with their task.
Andrew Norton 
The public benefit of opening a new super market in a poor community probably exceeds the private benefit of doing so. Does that mean we should provide massive (millions, perhaps even billions of dollars worth) subsidies to super markets? Or, running provides both a private and a public benefit, so where’s the subsidy on running shoes? Ultimately nearly every activity would provide some sort of public benefit, so it’s absurd to argue that anything that provides a public benefit deserves a subsidy.
The 50% result could still be useful to set a maximum subsidy though. If we accept that 1, the government should step in when there are market failures, and 2, that there is (or would be) a market failure in higher education, it makes sense to set the portion of the benefit that is public as the maximum subsidy. Based on that we should significantly decrease the subsidies on higher education.
This works because if the cost is $200,000, the public benefit is $1,000,000 and the private benefit is $1,000,000 (over the next 50 years), and most individuals would choose to forgo the future $1,000,000 benefit to avoid the present $100,000 cost that is the priority the government should use as well (after all it’s not the governments money, but rather the peoples).
As an aside the main argument I see against against this is that most uni students are young people without much money, but there is nothing stopping them from getting a job and putting off study or borrowing the money. If they’re older before they start Uni you obviously get less time to accrue public benefit, but several years of life experience mean that they’ll probably be more disciplined students, and will probably actually go into the field that they study, which I think would even it out. There’s also the argument that by this point they’ll be trying to raise a family and won’t be able to afford to study, but if they can’t afford the tuition via loan repayments, or direct payments, they aren’t going to be able to afford it via taxes either.
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Well, Pigouvian subsidies and taxes are all designed to influence behaviour at the margin. So although most people may not change their behaviour, the subsidy (or tax) is provide (levied) on all in order to induce a few people to do (not do) some desirable (undesirable) thing. The key is that HE places need to be variable and respond to demand.
What I don’t like is the implicit and never justified assumption that somehow studying science or medicine provides a lot of public benefits whereas, say, commerce does not.
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What I would like to know is what precisely are these external benefits if they are deemed to be so substantial? And how do those show up in countries that have higher rates of participation in higher education relative to others? I am not so convinced: my guess is that the returns are essentially captured privately and that young people are just keen for hard working tradesmen etc to give them a partial free ride.
Bruce Chapman, I recall, did some work many years ago on estimating the empirical scope of the revealed externalities by comparing private returns and actual expenditures and concluded that the magnitudes were unbelievable. The implication was that students should be charged more for what is essentially a private good.
Rajat however is correct by pointing to the argument being at the margin: at the margin there will be underprovision of higher education if there is a gap between the social and private benefit.
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Andrew Leigh did some empirical analysis of the social benefits of education. http://people.anu.edu.au/andrew.leigh/pdf/TaxSkills.pdf The evidence for them is limited for higher education.
The main ‘social’ benefits from higher education come from the state confiscating a large share of the private benefits and redistributing them to other people. But this just shows how high the private benefits are: even when the state is taking 40%+ they are still a strong enough incentive to enrol.
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