6.12.04

FINANCIAL AID? A Constrained Vision has been following several threads addressing the high prices for college textbooks. At the heart of the problem are several incentive problems. The professors assign the books, but don't buy them. The demand for the books is inelastic. (Yes, but under competitive conditions prices will reflect opportunity costs and new editions will appear at an efficient rate.) These posts all miss the elephant in the room: in many cases the buyer of the book has an attenuated incentive to shop around, as Mom or Dad will write the check for the books, or financial aid will pick up the tab.

The textbook price revolt is in full cry at Northern Illinois, where a number of publishers' representatives have stopped sending examination copies because professors reveal a preference for used books or for sticking with older edition. The publishers' representatives, however, are classic rent-seekers. If I'm listed as teaching an introductory course they swarm as if I were The Bachelor. If I'm listed as teaching advanced theory or antitrust I might as well be quarantined.

RUNNING EXTRA: See also Steven Pearlstein.

Let's take college tuition, which this year rose at a rate of 11 percent at public and 6 percent at private four-year colleges. In their defense, college presidents (whose pay has been rising faster than everyone else's on campus) will blame students and their parents for demanding more services, programs and amenities. They'll pull out flip charts to show that while the posted tuition appears to have leapt ahead, that's really a statistical mirage because of all the extra scholarship aid (read: discounts) they are giving out. And if that's not enough, they'll send you studies showing that the value of a college degree, measured in terms of future earnings, makes a degree a Wal-Mart-like bargain.

All of this may explain why colleges want or need or deserve to raise tuition. But the reason, in the end, that they do raise prices is, like any business, because they can. And one of the big reasons they can is the ever-increasing amount of public money pumped into the system in a losing effort to keep college "affordable." In effect, these well-intentioned subsidies have the perverse effect of shielding colleges from the kind of market discipline that would have forced them to hold down prices by constantly improving their productivity and efficiency, as happens in just about every other industry.

The argument generalizes to textbooks.

Arnold at Econ Log, who found the column, asks,
How could subsidies be constructed so that they serve to help the intended beneficiaries (poor people wanting to attend college) with minimal effect on the overall cost of college?
My suggestion: merit scholarships. Years ago Milton Friedman had an interesting idea: redesign student loans without the government guarantees. The Washington Monthly, years ago, kept track of how many graduates of medical and law schools defaulted on their student loans. Under the current system, loan recipients -- who may not be the deserving poor -- are in a position to put to the taxpayers their college costs, which are padded by textbooks sold under less-than-competitive conditions and fees inflated by expense-preference behavior by administrators who get the kudos for their commitment to "inclusiveness" without being called on for running up costs and admitting the unprepared under the polite fiction of "access."

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