From Public Good to Public Enemy

The Non-Market Failure of Higher Education

Drew CataldoPublic Finance

NON-MARKET FAILURE

• “Adverse selection is a concept in economics, insurance, and risk management, which captures the idea of a "rigged" trade.”

(Wikipedia)

• Government’s intervention into the market for higher education didn’t account for all possible “side effects”

• The market is not inefficient because of any natural value, but because regulation has further separated its equilibrium.

SHORTAGE

PRICE OF HIGHER EDUCATIONTUITION /FEES & ROOM/BOARD (2014-’16)

http://trends.collegeboard.org/college-pricing/figures-tables/tuition-and-fees-and-room-and-board-over-time-1975-76-2015-16-selected-years

HOW DO THEY GET AWAY WITH IT?

• Federal regulation Birth of a legal cartel

• A cartel, by definition is:

“An association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition.” (Wikipedia)

BARRIER TO ENTRY

http://ia.media-imdb.com/images/M/MV5BMTkzNzY5OTc3Nl5BMl5BanBnXkFtZTcwNjE4NDQzMQ@@._V1_SX640_SY720_.jpg

TOTAL FEDERAL & NONFEDERAL LOANS (OVER TIME)

http://trends.collegeboard.org/student-aid/figures-tables/total-federal-and-nonfederal-loans-over-time

MORAL HAZARD “SUICIDE”

• Students have to live up to social norm of going to collegeJob market requires itGovernment enables it

• Only 59% of full-time students at 4 year institutions graduate within their first 6 years of enrollment

• Too many students in debt with no degree…they never should have gone

STUDENT DEBT BUBBLE IS IRRATIONAL

• 30% of graduates from 4-year colleges/universities are underemployed

• “Baby Boomers” hold the highest paying jobs in 2015

• They faced microscopic debt in pursuit of their degrees in comparison to “Generation Y”

HERD BEHAVIOR

By definition:

“The tendency for individuals to mimic the actions (rational or irrational) of a larger group. Individually, however, most people would not necessarily make the same choice.”

(Investopedia)

HERD BEHAVIOR IN HIGHER EDUCATION

1) Government annually increases student aid2) Increase in enrollment3) Increase in degrees4) Value of possessing a degree in job market decreases5) Expected increase in income for achieving degree decreases

RESULT: Irrational Bubble in Higher Education

SOLUTIONS TO NON-MARKET FAILURE

• Different strategies…yet all share similar theme

Internalizing marginal damage to students

Increasing the marginal benefit of pursuing a degree

Stabilizing the economy through a “real money” valuation of supply and demand

Eliminating the market power of firms (colleges/universities)

OPTION 1:“THE WIN-WIN”

1) Removal of all “general education requirements” through federal mandate

2) Specialization of chosen majors improve from 2 years to 4 yearsStudents become more productive Their value to firms increasesExpected income increases

Result: DEMAND CURVE SHIFTS RIGHTP* increasesQ* increases

OPTION 2:“THE TEST-OUT”

1) Creation of “test-out” exams with federal mandate2) Students proving adequate knowledge through exam can

check off class in degree requirement Decrease in average total U.S. $ needed to complete degree3) Costs of producing higher education reduced greatly

Result: SUPPLY CURVE SHIFTS RIGHTP* decreasesQ* increases

OPTION 3:“GOVERNMENT KEEPS IT REAL”

1) Government caps current level of “relief” to higher education (grants & tax breaks)

2) Federal mandate eliminates entire program for student loans Cost-benefit valuation of consumption is now based on real individual financial situations Enrollment decreases sharply

3) Firms (institutes of higher education) MUST lower prices or they will shut down

Result: DEMAND SHIFTS LEFT & BECOMES ELASTIC Producer’s MR < ATC

P* decreasesQ* decreases…moves back to original in long run

OPTION 4:“PUBLIC GOOD METHOD”

1) Government assumes full control of higher education market through forced federal mandate Elimination of asymmetric information reveals “real cost curve”

2) Government sets price at socially optimal level MB = MC (now possible to evaluate)

Result: SUPPLY CURVE SHIFTS RIGHTP* decreasesQ* increases

OPTION 5:“TECHNOLOGICAL TRANSFORMATION”

1) Government mandate allows full transparency procedures of colleges/universities

2) “Web Cam” classes are introduced with federal mandate at a fraction of the cost Production cost savings Opportunity cost of consumption decreases

Result: SUPPLY SHIFTS RIGHT SHARPLYP* decreasesQ* increases sharply

INCOME EFFECT

• Average real U.S. $ savings per “Generation Y” student stimulates the economy as a whole

Works Cited

"Behavioral Finance: Key Concepts - Herd Behavior | Investopedia." Investopedia. N.p., 04 Feb. 2007. Web. 01 Dec. 2015."By the Numbers." By the Numbers. N.p., n.d. Web. 30 Nov. 2015."Economics Online." Types of Market Failure. N.p., n.d. Web. 29 Nov. 2015."Fast Facts." National Center for Education Statistics, n.d. Web. 29 Nov. 2015."HigherEdJobs - Jobs in Higher Education." HigherEdJobs - Jobs in Higher Education. N.p., n.d. Web. 29 Nov. 2015.Horwitz, Steven. "The Failure of Market Failure | Foundation for Economic Education." FEE Freeman Article. N.p., n.d. Web. 29 Nov. 2015."Total Undergraduate Student Aid by Source and Type over Time." - Trends in Higher Education. N.p., n.d. Web. 29 Nov. 2015.