Accounting for inflation, the price of average tuition and fees at a public university has increased by 102%, and the price of average tuition and fees at a private university has increased by 137%.
Demand is the amount of a product a consumer wants and is willing to purchase. Supply is the amount of a product a supplier is willing to provide. The equilibrium price and quantity are determined by the intersection of demand and supply. When the demand or supply curve shifts, so does the equilibrium.
Demand of College Education
The demand for higher education has increased, and thus the demand curve shifts to the right. In 1967, 2.2 percent of the United States population was enrolled in full-time undergraduate programs (shown in D1), while in 2010, 3.7 percent of the population was enrolled in full-time (D2). This is due to the fact that annual returns on investment in a college degree is quite high compared to other forms of investment like stock market or gold.
While supply isn’t fixed–professors can be hired, classes can be expanded–it is still restricted for several reasons. Resource allocation, or where resources and finances are assigned, plays a major factor into this–“add a thousand extra students or get new computers?” Also, as colleges reject more and more applicants, they become more desirable, as it is perceived to be more choosey and therefore more elite. A college education is therefore both rivalrous, as its consumption by one person reduces its availability for another person, and excludable, meaning it is possible to exclude people from using the good, as it comes with a hefty price tag and also is restricted to those who are accepted into the school.
However, this leads to student debt, which is a negative externality. An externality occurs when the actions of consumers or producers create positive or negative side-effects on others who are not included in these actions, and whose interests are not considered. The total student loan burden is now over $1 trillion, and two-thirds of the class of 2011 is taking out loans. Often, this money is paid by the state or federal government. In turn, taxpayers’ dollars are used.
Negative Externality of College Tuition
Here, the marginal society benefit, or how much society benefits from one extra unit of education being consumed, is lower than the marginal private benefit, or how much one person benefits from one extra unit of education being consumed. Since people will buy an education based on their own benefit and not society’s, the marginal private benefit curve is also the demand curve.
If college is so expensive that student debt is weighing down the economy, what can be done? First, the substitutability of education should be examined. Substitute goods satisfy similar needs, and all colleges will provide a degree of some sort. A private college has an average annual tuition more than double the price of a public one. The topic of whether or not the education at a private school can be substituted with an education at a public school has been worked countless times, with no definitive “right” answer.
If the price of college tuition were to decrease instead of increase, the demand for education would increase, and there will be more enrollments in both public and private schools. As the price is lowered, higher education will become a more viable possibility to many people, as it will be more affordable. As a result, less student loans would be taken out, which would decrease the government’s burden, and less taxpayer money would be spent covering student debt.
However, from the view of different stakeholders, the decrease of college tuition may not be a positive thing. Class numbers would mostly likely swell, and students could be lost in the crush of faces and bodies. Faculty at a college may suffer from salary cuts, and so the quality of education could decrease. More college graduates means more competition in the job market, and those with a degree may find themselves out of work, even after four years of studying at university.
To sum up, the demand for college education has increased despite price increases, but this leads to more student loans being taken out, and the debt is a burden that falls to U.S. taxpayers’ shoulders.