Should We Charge Different Fees for Different Majors?

Rick Scott.jpg

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.

Richard Vedder

Richard Vedder

Richard Vedder directed the Center for College Affordability and Productivity and teaches economics at Ohio University. He is also an Adjunct Scholar at the American Enterprise Institute. His new book, "Restoring the Promise: American Higher Education Today," will be published this spring.

3 thoughts on “Should We Charge Different Fees for Different Majors?

  1. ” If a student who excels in philosophy is lured by money to be mediocre in chemistry, has society benefited?”
    Yeah, probably. The student probably has too.

  2. This is a disappointing analysis of a completely unworkable idea. I suspect that Professor Vedder is not so blase about the ability of government bureaucracies to solve predictable and complex problems in other contexts.
    First note that the governor plans to impose lower tuition for students who major in chemistry as compared to students who major in English. In reality, of course, chemistry teachers are paid more than English teachers and require expensive labs and equipment. Vedder very vaguely discusses the ways in which differential pricing could make sense in a theoretical model, but the actual case we have in front of us shows how politicians are completely unable to implement this idealized model and are in fact proposing one which would raise, not lower, costs.
    How would differential tuition rates be decided in reality, as opposed to in the models which Vedder can imagine in his office? Should individual academic disciplines heavily lobby state legislators to argue for the value of their subject? Perhaps each year (every five years?) there could be a massive study for each institution which purported to show salaries for every discipline (five years out? twenty years out?) Who would do these studies and why should salary alone be the criterion (benefits? leisure time? respect from society?)
    Disciplines would splinter since political scientists who focus on international relations would have different outcomes and so different tuition rates than those who do political theory or American politics. Depending on the incentives, one could also imagine disciplines only admitting to the major the very best students, and in general penalizing teachers who take on students who face challenges or are just less able.
    If biology students paid less we can expect a whole set of courses in “biology” which require no math and involve a lot of material we would have previous seen in social sciences and humanities. To prevent this the state legislature would have to define what biology is–is that desirable or likely to lead to a good outcome?
    Right now students major in what they are good at. If a student who excels in philosophy is lured by money to be mediocre in chemistry, has society benefited?
    Any attempt to institute a differential tuition system will require state legislatures to take on a task they are unable to perform and will lead the traditional disciplinary arrangements of universities to be convulsed in response to the arbitrary and unprincipled regulations that the legislature comes up with. If Professor Vedder wants to be successful in bringing radical change to the university, he needs to be willing to tell his political allies sometimes that their ideas are bad.

  3. Thank you for your thoughtful discussion.
    What colleges currently do is “bundling”: tuition gets you an English or Physics major plus a football team plus a melange of victimization movements. This is prima facie evidence of monopoly power. Enhanced competition would break this up. The key to that lies with the Feds and the accreditation cartel.
    As for Florida specifically, they got it the wrong way around: They have no clue where the future lies, just as I don’t, so for efficiency they should charge tuition proportional to cost. An xxx Studies major may have small market value, but s/he costs little to produce. Those guys swirling tiny particles may have a high income over their lifespan, but their educational toys are very, very expensive!
    Somebody gotta pay for the machines.

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