The Structure of Tertiary Education Fees

This paper is an attempt to apply the standard framework of conventional welfare economics to the question of tertiary education fees. In Section 2, I indicate what that standard framework entails. Specifically, it isolates as the appropriate fee (in the absence of other relevant distortions) the i.e. a net benefit from the marginal student’s education not accruing to the student herself. I argue that information about the size of the latter element is unavailable, and necessarily the subject of conjecture: in other words, we have no firm grounds for deciding between alternative claims that the relevant spillovers are very large or that they are negligible. However, by making what I reckon are fairly plausible assumptions about the nature of such spillovers, I believe we can reliably claim that the standard framework has implications for the appropriate structure of fees; and it is these implications I develop. In Section 3, the influence of marginal cost on fees is discussed. Since marginal costs under the best available estimates differ quite significantly among courses (almost twice as much for medicine, say, as for economics), fees should also differ among courses, or at least should do so unless spillover benefits also differ among courses according to differential marginal costs (which I find hopelessly implausible). Students should take into account the differing costs of alternative course in main choices among them: if a student is indifferent between a course costing $4,000 and one costing $7,500 she should be encouraged to pursue the former. The logical way to do this is to incorporate cost differentials into fee differentials dollar-for-dollar. Fees should on the same basis be higher in the more expensive second and third years of a course than in first year. In Section 4, I discuss the question of fee differentials across students. My argument here is that students should be encouraged to go to university according to the probability that they will be successful and that this probability differs across students with different (measurable) intellectual capacities. Section 5 considers the extent to which labour market distortions and tax considerations might overturn the arguments for differential fees. My general conclusion is that they do not: and that indeed some of the arguments seem to be somewhat stronger when the obvious distortions are allowed for. Section 6 offers a brief concluding summary.