Tuition Fees Debate

In recent years, there has been a huge change in the economic climate. We learn from first year principles that when our opportunity cost of time spent in the workforce is greater than that of pursuing higher education, rational people choose school. Thus, universities have been struggling to meet surging market demand for places during this economic downturn. An article in BBC news reported that Cambridge will be raising tuition fees to £9,000. This isn't all that surprising if you consider that the efficient way to reduce quantity demanded (number of students wanting to attend university rather than work for lower wages) is to raise the price. Interestingly, Oxford will be raising their fees to a mere £6,000. Those without the willingness to pay £9,000 will move from Cambridge to Oxford where it is relatively cheaper to get a degree. The bottom line is that raising prices makes sense from an economic perspective. A new efficient equilibrium will be reached.

So what about those who are against raising fees, and even believe that education should be free? The benefit-pay-principle means that as education is an investment and students gain from it financially, it is rational to borrow at this stage of their life to finance their education, forgoing current earnings in return for higher future earnings.

If we did not charge fees, placements would be allocated by the next best way, say by GPA. That means that those who slacked off in high school and got low grades (but who potentially could be brilliant) wouldn't get the chance to study. Society would loose out as a whole. Higher education is what we label a positive externality, or in this case a merit good. The idea is that the benefits to the individual can spill over to the rest of society, giving rise to macroeconomic advantages. A well-educated labour force will increase efficiency and productivity leading to lower unemployment rates and increased returns with benefits to the supply-side of the economy. Further, benefits of growth can stimulate capital investment in the physical sense and adoption of technological development.

Finally, in case some of you get confused, economists have a very precise definition of demand. Confusing quantity demanded with demand (and supply and quantity supplied) will inevitably lead to serious mistakes in the most simple of economic analysis.

The specific quantity desired for a good at a given price is known as the quantity demanded. For example, if Starbucks lowers their price of a tall coffee from £1.50 to £1.00, the quantity demanded will rise from 30 coffees an hour to 40 coffees an hour. (a movement along the demand curve)
A change in demand refers to an increase or decrease in demand brought about by a change in the conditions of non-price determinants. (a shift in the demand curve)