In the first couple weeks of any survey course in the
principles of economics, students are taught that prices are determined by the
interactions of consumers (demand) and producers (supply). Prices for many
things, such as oil, or of common stocks, constantly change with the frequent
shifts in the willingness of consumers and producers to buy or sell the good or
service in question.

Yet the price of college–tuition fees–seems to be
determined differently. For starters, tuition fees change but once a year, not
constantly. Universities are like restaurants, with “menus” giving prices for a
variety of different offerings, with the menu changing once a year.  For many schools, however, the listed price
is not what economists call an “equilibrium” price–a price equating quantity
demanded with quantity supplied. Rather, thousands are turned away at the
listed price at selective admission universities.  Also, massive price discrimination exists, so
many customers–often a majority–pay less than the stated or sticker price.

Amidst all of this, schools typically charge students the
same regardless of their major. A committee advising Florida Governor Rick
Scott has recommended a move to differential pricing–majors would pay
differing amounts. The goal is partly to entice students into the STEM
disciplines (science, technology, engineering and math) on grounds that our
future would be enhanced by having more scientists relative to, say, English
majors or anthropologists. By making STEM tuition fees lower, we will encourage
enrollment expansion in those fields. Ohio University’s Board of Trustees
recently considered (but did not yet adopt) a multiple-price approach, and
other schools are doing so. 

Aligning
Costs and Benefits

I have mixed reactions to this proposal.  Conceptually, it is a good idea. Within
universities, on the supply side, the cost of educating say, mechanical
engineers, is probably a good deal different (I would surmise more) than
educating English or history majors. From the consumer perspective, the demand
for engineering majors often exceeds that for English majors. Differential
tuition pricing potentially could more closely align the amount students pay to
the costs and benefits of various degrees.

For example, if we have underutilized anthropology
professors, the cost of educating one additional  anthropology major may be close to zero–existing faculty could handle the job. If we have accounting professors working
at capacity, the extra cost of adding another major or two might be very high–requiring more  faculty. Having lower
prices for anthropology majors and higher prices for accounting majors might
lead to a better, more efficient utilization of university resources.

Despite claimed altruistic motivation, the current
approach of charging different students varying amount for the same services is
probably as much an attempt at revenue maximization; in economics jargon, each
individuals has his or her own demand curve, so the “equilibrium” price varies
by individual. This is the same approach used by airlines–charge
price-sensitive tourists buying their tickets well in advance far less than
price-insensitive business persons flying on short notice. The airlines collect
more revenue, planes fly at near capacity, and resources are more efficiently
used.

Out-of-State
Students Pay More

Moreover, differential tuition pricing is already
practiced in other ways that make some sense. At public schools, since state
subsidies for out-of-state students are vastly lower than for in-state
students, a higher tuition fee is typically charged the out-of-state students.
Expensive programs such as aviation flight instruction or individual tutorial
training in, say, piano, are often financed in part by special additional fees.

The move to differential pricing by major subject is a
move back towards the Oxford University model of around 1700, discussed
famously by Adam Smith. Each professor charged tuition fees as he saw fit.
Popular teachers might charge more than less popular ones. The professor
collected the fees, not the university, and Smith thought the quality of
instruction declined when that practice ended, because professor salaries were
less aligned to performance and student demand.

Yet differential fees also can present problems. For
example, an assumption in the Florida proposal is that graduates in the STEM
disciplines would promote economic growth more than other graduates. If STEM
graduates were super-productive, this should be reflected in their receiving
higher salaries than virtually all other occupations. That is not always true.
Philip Coelho and Tung Liu in a recent paper, for example, suggest mid-career
graduates who majored in biology make less than those majoring in economics or
philosophy. Moreover, relying on demand/supply considerations would probably
typically lead to higher, not lower fees in STEM disciplines.  Politicians or university bureaucrats setting
tuition levels to favor trendy or politically favored areas could turn out to
be a disaster from an efficiency standpoint.

Differential tuition introduces a host of logistical and
administrative issues. Students are constantly changing majors. Could a student
largely avoid higher fees by staying in a low tuition major until late in
his/her college career, than switch into the high priced major at the end?
Charging differential tuition by course (the Oxford model) could deal with
this, but then there is a serious information cost problem–but how can high
school seniors and their parents compare tuition fees between two schools like
Michigan State and Indiana University when the fees vary widely within the two
institutions? For any given 100 freshman, there may be 100 different tuition
fees.  Differential fees could well
impede legitimate, desirable academic mobility -migration between majors.
Administrators of high-priced major A may put up barriers to keep kids in
low-priced major B from taking their courses–almost like nations imposing
tariffs on other nation’s goods. These problems are solvable, but they do
exist.

Bottom line: differential tuition is a promising
innovation, but poorly done it could lead to worse outcomes than at the
present. The devil is in the details.