To great controversy, England is lifting the cap on university fees to £6,000, with charges up to £9,000 if access measures are put in place. To the government’s unpleasant political surprise, most are going to the full £9,000 from 2012. This is similar to the experience in Australia in 2005, when universities were permitted to charge up to 25% more than the previous HECS rates (except in education and nursing). Pretty soon all were charging the maximum fee.
While not all these fees are rip-off prices, given the cuts to tuition subsidies, I don’t think this is a very good outcome. Even on zero subsidy, in some courses £9,000 in income would translate into significantly more than cost, if Australian costs are any guide. So what’s going wrong?
Without being expert on English higher education, the mistake appears to me to be partially deregulating prices while regulating supply. In the UK as here in 2005, when the government restricts supply to well below demand it’s a licence to increase prices. If people want a degree, they will have to take what is offered even if it is over-priced (though we are yet to see if in practice demand will dip in the UK). Uncapping supply and letting new entrants into the system would create more pressure to keep fees down.
Though I am not sure of this, I wonder whether the capping process itself might be having perverse consequences. Price fixing is a kind of price signalling. Most unis probably decided that they could guess what their competitors would charge and matched it. Everyone goes for this one price point. In a fully deregulated market without this price norm we surely would have seen a wider range of fees (as we do in fact see in deregulated markets).
One other quirk of the British system is that unis that charge £9,000 rather than £6,000 have to provide assistance to low-income students. What it means is that other students have to borrow money to subsidise their classmates. Though given the poor market design of the British higher education system there is no guarantee the money otherwise would have been spent on those actually paying the fees, scholarships and bursaries are unfair, increase costs, and fail to achieve their objectives.
The UK government has paid a political price for its higher education reforms. It is a pity that given the decision to spend so much political capital (especially for the Liberal Democrats) it didn’t go for a better policy.