Monday 21 June 2010

Supply and demand

A handy summary from The Metro. The demand curve for university education can be plotted as follows:

Tuition fees £3,225 - 80% want to go to university.
£5,000 - 68%
£7,000 - 45%
£10,000 - 26%.

In a truly free market, tuition fees would be at least equal to the costs involved (plus a profit margin) but no more than the discounted present value of the additional lifetime earnings that potential students expect to receive as a result of having a degree (plus or minus the fun you have being a student). I sorely doubt that the full cost of a year's university education is as much as £10,000 per year for most subjects, so that's unlikely to happen (Oxford and Cambridge could probably get away with charging twice that, but that's a separate topic).

As we know, over the past few years, far too many young people have been going to university, i.e. taxpayers' money has been wasted; the premium for graduate jobs has been eroded; and so there are a lot of graduates (now saddled with student debts) who would have been better off starting work straight after school.

One argument against tuition fees is that graduates tend to pay more tax in future, which is a non-argument, as income tax and VAT also hit higher earners who didn't study. And subsidising higher education but not other forms of training (lorry drivers, plumbers, hairdressers, whatever) is clearly a distortion.

So how about we scrap the tuition fees cap, cut higher education funding, cut income tax and VAT a bit and let people make their own decisions? That can't possibly lead to a worse outcome than what we've got - and as we well know, universities are self-perpetuating, so they will all offfer bursaries or grants to bright-but-poor students who would otherwise be put off by the fees (that said, somebody who can't work out whether his or her extra future earnings will be big enough to justify the cost shouldn't really be going to university).

3 comments:

Anonymous said...

One argument against tuition fees is that graduates tend to pay more tax in future, which is a non-argument, as income tax and VAT also hit higher earners who didn't study.

Surely the argument is that most graduates benefit from university, in turn generating more wealth than they would otherwise do. Therefore the non-graduate high earner would have earned even more had they completed a degree.

There are two interesting points about this argument:

1. It is usually advanced by people who, on any other issue, buy into the "fixed size of cake" fallacy.
2. The argument relies upon the collectivist view. We should do it because it benefits society more to put some people through higher education than not. At both ends it is "society's" money that is being spent and collected. There is no sense that individuals ought to do this for themselves

dearieme said...

Surely we could save a fortune by offering our youngsters maintenance grants to go and do degrees in France and Germany at the expense of their taxpayers? Don't tell me that it would be against EU rules - just hire a bloody lawyer and get on with it.

Mark Wadsworth said...

Anon, that's an interesting take, but I think you credit them with too much logic.

The fact is that higher earners pay more tax anyway, whether HE is subsidised or not. In any event, we are beyond the 'bigger cake' optimum, and are wasting so much money on it (individually or collectively) that the cake is now shrinking again.

So I have some sympathy with the official UKIP view that if 'only' twenty or twenty five per cent of young people did HE, the taxpayer would be able to afford to subsidise it and overall we'd be better off.

D, we have the same issue with Scotland. Can an English citizen rely on EU law to demand 'free' HE in Scotland?