The High Cost of College: An Economic Explanation

September 18, 2012

College costs are increasingly becoming an issue for parents in the middle and upper-middle class. Because of federal government support, colleges have adopted a policy economists call first degree price discrimination. Price discrimination works in the following way, says Kenneth Gould in The American.

  • Every good or service offered for sale has a different value for different people, depending on how much they can spend on it.
  • Normal market pricing occurs when the producer chooses a reasonable price that consumers are willing to pay for a good while allowing for a profit.
  • However, first degree price discrimination occurs when producers learn what each customer is willing and able to pay, thus allowing producers to set individual prices, thereby eliminating competition.

This form of price discrimination is simply another method of means testing.

  • Means testing occurs in other areas too, such as government benefits.
  • For instance, Medicaid and the Supplemental Nutritional Assistance Program (SNAP) are all methods of means testing to ensure that low-income receive benefits, excluding higher income families.

With the passage of the National Defense Education Act in 1958, intimate details of a family's financial situation were used in a formula to determine how much federal aid is needed to pay for college. But the elimination of competition as a result of this discrimination has led to higher production costs at a faster rate.

Proponents of the current system argue that first degree price discrimination evens the field and allows lower income families to afford college for their children. However, as the cost of college increases, the amount that low income families will be able to burden becomes lower. As a result, those with more means have trouble shouldering the rising production costs, thus passing on those costs to those of lower means.

One possible solution to keep costs low would be to stop giving colleges information about a family's finances. Instead, families that needed federal aid would still be able to provide their financial information to the government to receive money; however that information would not be available to colleges. Furthermore, this would return competition to college pricing which would drive down production costs, making college more affordable.

Source: Kenneth Gould, "The High Cost of College: An Economic Explanation," The American, August 31, 2012.

 

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