Wednesday, August 08, 2007

Differential Pricing Grows in Popularity

By Richard Vedder

My new colleague, friend, and sidekick Andy Gillen pointed out a nice story in the New York Times about the growth in differential pricing of instruction within universities. More and more schools are charging different amounts for different schools or colleges within universities. The University of Wisconsin charges business students more; a slew of schools (e.g., University of Nebraska, Iowa State, Rutgers) ask more from engineering students, and some even charge students in undergraduate professional schools (e.g., journalism at Arizona State) a premium.

I have long advocated doing this. On the supply side, it probably costs more to educate engineers and business students, in part because of high salaries for professors, in part (especially in engineering) because of substantial equipment costs. Moreover, the payoff to students from degrees in these areas is, on average, higher than average, so higher tuition fees actually works to equalize the rate of return to students on their college investments (in relation to other, lower paying fields). It reduces university incentives to short change areas that are expensive to operate.

At the same time, however, I suspect a lot of this differential pricing is done with less than honorable intentions. Schools can raise their base tuition fee by, say, 5 percent, but create new incremental fees for engineers and business students, bringing the effective average tuition increase to, say, 7 percent. The school will brag "we held our tuition increase to five percent," ignoring the much larger increases for portions of the student body.

Private schools, by and large, appear to not be participating in this trend to the same extent, especially liberal arts colleges. That increases my suspicion that much of the is part of a political game of public schools to raise tuition fees more than it appears. The same thing is going on, I think, with room and board charges, which are rising more than the cost of food and housing in the general economy.

Will poorer students be deprived of the opportunities to go to high cost programs within institutions? In principle, no. Scholarship aid should vary with total costs. Students who go into high remunerative fields can also safely borrow more. The notion that higher education prices should be low because education is a public good takes another hit with differential pricing, I suspect. As I have indicated elsewhere, however, I think higher education is primarily a private investment good, as well as a consumer good, not something with massive positive externalities as the higher ed apologists and romantics would like you to believe. So, for me, on balance the differential tuition movement is on the whole a healthy trend.

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