By Richard Vedder
If CCAP had a marketing guru, he would probably say "change the title of this blog; no one will read anything with the phrase "elasticity of demand" in it. Yet this technical economic concept is immensely important to higher education policy.
Dave Narcotte, of the University of Maryland Baltimore County, and Steven Hemelt, a former UMBC student now teaching at Cornell College (which in CCAP's estimation offers at least a good of an education as Cornell University) have estimated the elasticity of demand for higher education at four year schools, especially research universities.
They estimate overall the elasticity of demand is -.10 --- a 10 percent increase in tuition fees will lower the quantity demanded be one percent. That is a low elasticity. To be sure, the elasticity varies some with the type of institution (I suspect it is higher at community colleges, for example), and there is the old issue of gross vs. net tuition. Indeed, colleges price discriminate (give scholarships) to precisely those students who they think are price sensitive --who have a high elasticity of demand.
Let us suppose that Narcotte and Hemelt are fundamentally correct, that in general the demand for higher education is highly inelastic. What are the implications of that? For starters:
1. Attempts to generally keep tuition low to expand student access are not likely to be terribly successful --across the board tuition reductions will only modestly boost the quantity demanded;
2. Enrollment restriction strategies like those currently being followed by the California State university system will lead to sharp increases in equilibrium (market clearing) tuition fees; the economic feasibility of increasing fees a lot increases, although legislative restrictions or other political considerations often prevent universities from following an equilibrium pricing strategy;
3. The strategy of raising sticker prices a lot and price discriminating more makes financial sense to universities ---many students are prepared to pay whatever the market will bear.
4. Student loan, Pell Grant and other programs probably have less of an access impact than supporters believe, probably explaining in part why the exponential growth in federal student loans has actually accompanied a slowdown, not growth, in the rate of increase in higher educational attainment.
Boring economic concepts have big implications. The Marcotte and Hemelt research is useful and needs to be replicated and/or challenged by others.