Upset About UNC Tuition Hikes? Here’s a Free Economics Lesson

Here is a free economics lesson for these college students protesting proposed tuition hikes.

The price of a good or service (such as tuition and fees for college) is set where supply equals demand. When that price is allowed to be set in a free, competitive market, the price will bring into harmony these factors.

But when government interferes with the function of the price system, we get shortages, excess inventory and – as in this case – skyrocketing prices. Much like our government-managed health care industry, the market for a college education is highly distorted by government subsidies to the schools, direct student aid, and cheap government loans.

These factors artificially inflate demand, and create a sizable wedge between what the consumers (students) pay for the product and the income taken in by the producers of that product (the universities). The inevitable result is skyrocketing prices completely out of line with true consumer demand. These rising prices arise in large part because universities can “invest” in greater and greater amount of inputs that create little value to the consumer (i.e. duplicative and little-sought after degree programs or “research centers”).

But when part of that revenue stream (ie. state subsidy) takes a small dip, the universities scramble to hike the price because they don’t feel any real need cut back on inefficient expenses, knowing that the subsidies will once again rise and that other government programs like direct student aid and cheap federal loans will keep flowing in the near future, because politicians must “do something” about the rising cost of tuition. The whole process plays itself out in a never-ending upward spiral of tuition while the quality of the product declines.

The protesters would be much more effective if they first understood the root causes of skyrocketing tuition.