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The social costs of high university charges

15 April 2015

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Photo: Andrew Taylor

Photo: Andrew Taylor

This is an extract from Bruce Chapman’s submission to a Senate Committee inquiry into higher education fee deregulation (February 2015) in which he proposes a “progressive tax” on university funding as a means of constraining fees.  He suggest sthe question of what the “right” price to charge students for public sector university teaching services  “is not an argument that can be made easily with reference to economic theory or compelling evidence related to allocative efficiency. It is instead basically an ethical issue.”

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It needs to be asked: Does it matter that students/graduates might end up paying very high prices for higher education in Australia? Why should we be concerned about this possibility when it will still be the case that even with very high price rises, average lifetime graduate incomes will remain far greater than the incomes of non-graduates? This issue has exercised considerably my reaction to the fee deregulation debate since the Budget was brought down in May 2014. Some basic points are as follows.

There is no compelling and accurate answer to the question of how much students should contribute to the costs of running Australian public universities. Including my own research, all attempts to explain and measure the social benefits of university teaching are fraught with problems of inadequate data, less than convincing method and unclear conceptual interpretation.

But we do at least know that the private rates of return to higher education investments (the lifetime income advantages held by graduates) are high on average, implying strongly the case for a contribution to teaching costs from graduates. Indeed, this argument was fundamental to the reintroduction of fees in the form of HECS in 1989, and it remains powerful today.

However, I believe the question of what the “right” price to charge students for public sector university teaching services can be clarified with allusion to a principle concerning the role of government. It is not an argument that can be made easily with reference to economic theory or compelling evidence related to allocative efficiency. It is instead basically an ethical issue.

My view is that there is no clear economic justification for public sector universities to be allowed the use of a government instrument, HECS, to raise substantial revenue, in a situation in which this can lead to unjustifiably very high fees. An informed guess is that if Australian universities were to charge the sort of prices that I believe many of them could under the planned fee deregulation, the revenues received would in many cases far exceed the costs of teaching. While there is little doubt that in many cases these sorts of cross-subsidies already occur (particularly from the revenues received from international students), the issue for me concerns the extent to which this can be considered a “proper” use of the HECS instrument.

That is, if it is the case that fee revenues from price deregulation exceed considerably the costs of teaching, it is arguable that this is an improper use of a government instrument; basically put, it can be considered to be unfair. This then promotes a case for considering “excessive” fee increases in a space which economists label “negative externalities”, or, broadly speaking, as costs borne by us all, in this case because of the presence of an unreasonable/unfair use of policy power.

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