Subsidies, Hierarchy and Peers: The Awkward Economics of Higher Education

Abstract

Higher education is an industry where markets don't clear, prices on average cover less than a third of production costs, the resulting student subsidies are given in strikingly different amounts by different schools, creating a sharply hierarchical market. And an input important to production can be bought only from the firm's own customers. This paper describes the resulting structure of costs, prices, subsidies, and hierarchy using an augmented theory of nonprofits and 1995 national data to show their magnitudes and suggest their often significant implications. Public intuition and economic models of firms, industries, and welfare often yield distorted understanding and dubious public policies.