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I am sympathetic to the argument that “we” do not produce higher education very well because of the increasing and high costs of attending and producing “higher education.” I am especially sympathetic because I see lots of what happens here. But this view of higher education is too narrow. If what “we” were selling to students and parents was a top quality, liberal education that improves critical thinking skills, raises intellectual curiosity and improves students’ respect for the rule of law and private property, then I’d certainly agree that we are failing. But that is surely not what we are selling here.

This is not a new observation. But we are selling a matching marriage market. We are selling connections into career and graduate school admissions. We are selling a fun place to party. We are selling participation in frisbee games on the quad. We are selling a 4 year period to be coddled by someone other than mom and dad. We are selling a whole smorgasbord of things that have little to do with education. And we probably produce and distribute these things very efficiently. Just think of what a 4 year pleasure vacation might cost you if you unbundled it.

Surely I benefit personally from this bundling of education. But so, too, does the general public. Let’s think about the standard argument for the inefficiencies in the private provision of things like schooling. The argument goes like this: since individuals only think about the private financial returns to attending schools, and do not consider the benefits they confer on others (in the form of being a better citizen, etc.) then when produced privately, we get an inefficiently low level of schooling. And even if this were not true, imperfections in the capital market suggest that a private market in education would under-provide education because of an inability for lenders to properly collateralize loans to students.

In terms of the first argument, it sounds very much like the standard light-house argument. Light houses are thought to be a good example of public good because owners of lighthouses cannot easily exclude non-payers from enjoying the benefits of the light. As a result, the presence of so many free-riders leads too few light houses to be produced. Of course, this problem can be easily solved today with technology. In the past, it was actually solved by bundling. Sure, light house owners could not easily charge any passersby to access the light, once turned on, but they could charge boats a fee when and if they came into port. In other words, owners of ports and harbor slips ended up bundling the lighthouse services with the port services and charging a fee that covered the cost of providing both. This solved the problem – even if some people still got to free-ride on the lighthouse who never came into port.

Now think of higher education the same way. The free-riders here are the rest of society, who rarely compensate students to obtain more higher education, but they certainly do benefit if I do get educated. Textbooks suggest that governments simply subsidize students (or worse, run schools themselves) to overcome the free-rider problem. But think of what colleges have become. Just as port- and slip-owners ended up bundling the valued public good (the light) with the valued private good (the port-slip), which is easy to exclude non-payers from, so too have colleges bundled this public good (education) with an easy to exclude private good (entry into the dating market, party scene, connections, etc.). Thus, it is extremely likely that the public goods problem in higher education has been solved, and perhaps even “oversolved.

What of the liquidity constraints? First allowing colleges to price discriminate as they do, dramatically expands access to students that would otherwise be constrained by having liquidity unconstrained people subsidize those that are. How much of a problem remains after this runs its course is an empirical question. But the problem here is a little different once we understand that there is no free-rider problem in higher education. The problem is the same one we need to think about when it comes to any other high-priced good like cars, homes, vacations, and the like. Whether there is a role for government to improve liquidity in those markets is not entirely clear, especially if we are already dealing with the “problem” of low income through other means such as the EITC and various other transfer programs.

3 Responses to “There’s No Public Goods Problem in Higher Education”

  1. Harry says:

    Great points, Wintercow. Even though I have had many cynical ideas about higher education during my formerly unwise life, I am glad we had so many choices.

    One year in college I bought a ticket that got me a seat for ten performances in the Busnell auditorium, Hartford’s version of Lincoln Center. Saw a memorable performance of Don Giovanni, memorable enough to picture the baritone soloist vividly.

    But I can also remember a time near finals shortly thereafter remarking to my brother that each class was priced about the same as a box seat at the Met.

    Of course every moment of my college career was spent efficiently with this in mind, not counting the far-flung road trips. Hey, it’s a free country, right?

    My problem with education is that from where I sit, elementary and secondary education has deteriorated from what it was in my day, which may have not been what it had been in my parents’ day.

    You cannot expect anybody to handle much if they cannot read. And some people, including a couple of childhood friends, barely had the ability to do that. But the school system back then taught them how to read and how to compute well enough for them to live on their own as free men.

    My biggest tax bill is for school taxes. Millions of dollars out the door. Our local school system is pretty good, as long as you work to get your kid into the right classes. How come do we have a host of ignorant slackers who cannot begin to take care of themselves?

  2. Harry says:

    I noticed you filed this one under “market failures” which I would assume to be an example of where the market flourishes. Higher education flourishes along Lake Ontario. It’s still a free country!

  3. Rod says:

    It seems to me that colleges and universities are really engaging in a form of racketeering, where employers and grad schools conspire to make that degree from University X the ticket for admission. Instead of Vito and Vinny, you’ve got the bursar’s office.

    If only more employers (or even medical and law schools, for that matter) did not require a bachelor’s degree, the racket would not work. I can imagine how it would be a lot cheaper to get together with other students and hire a tutor or two, and then join a country club for recreational opportunities like golf, tennis, squash and swimming. In the winter, take the tutors with you to sunny Spain. For a lecture hall and visiting lecturers, rent a suite at the Four Seasons and order from room service. I bet you would have a hard time spending 40 grand each per year.

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