This Crazy Concept Called "Pricing"

Article Highlights

  • The normal way that free societies encourage "responsible" behavior when it comes to the cost of services is to allow sellers to set a price and buyers to decide whether they're willing to pay it.

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  • Massive state and federal subsidies ensure that tuition at public two- and four-year institutions has little relationship to actual per pupil costs.

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  • if you're not going to let market dynamics play out, you're stuck with efforts to insist on "responsible" behavior by fiat

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The headaches here are implicit in the way that the President views higher ed. It's hardly fair to pin the blame on President Obama alone, however, because policymakers have spent decades wedging us into this corner. The normal way that free societies encourage "responsible" behavior when it comes to the cost of services is to allow sellers to set a price and buyers to decide whether they're willing to pay it. The resulting market dynamic creates pressure on self-interested sellers to moderate their pricing, and encourages buyers to pay attention to cost.

In higher education (like in health care), we've done our damndest to smother this dynamic. Massive state and federal subsidies ensure that tuition at public two- and four-year institutions has little relationship to actual per pupil costs. Grants, loans, and subsidized interest rates mean that students have only a notional sense of what the true cost of higher ed is going to be. And massively discounted tuition for huge swaths of students means that prices don't mean much anyway.

One response is to try to start to foster more transparent data on price and quality. Happily, the administration is promoting some useful steps on this count. A second, more crucial step, would be to start to remove the subsidies and largesse that distort the higher ed market and make it only to easy for institutions to raise tuition without consequence. Unfortunately, here, President Obama simply promises more subsidies (discounted interest rates, calls for more state dollars) to complement the largesse he's previously championed (in ARRA, tucked into health care reform).

The frustrating result is, if you're not going to let market dynamics play out, you're stuck with efforts to insist on "responsible" behavior by fiat. And then we wind up with the President's finger-waving "you better behave" histrionics.

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Frederick M.
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