RESPONDING TO THE EXCESS DEMAND.  Kenneth Anderson of The Volokh Conspiracy considers the tradeoffs of state universities pursuing more out-of-state students who pay full fare, with the effect of crowding out qualified in-state students.
The public university faces a serious crunch in state funding.  It seeks to respond by bringing in more out-of-state and international students who will pay its full tuition cost; each of those students is much more valuable than an in-state student, no matter how well-qualified.  Anyway, if you have all of China to choose from, you can always find someone who will fit the bill, both intellectually and financially.  But the out-of-state tuition does not really cover the subsidized fully internalized cost of the public university to that state’s public.  That’s so in a direct sense, in terms of direct subsidies, and if one counts the capitalized costs of past subsidies, often over a century or more.  And the even more indirect, but still important, costs of community, alumni, and other goodwill (including the very expectation and promise of long term state funding — the effect of which is to give others the confidence to contribute, donate, and help build the institution over the long term), then the fully internalized cost would be far higher still.

The university has little incentive to charge that cost; all that matters to it is something over the current in-state tuition cost that the out-of-state traffic will bear.  In the face of demand from in-state students, however, this is a bad policy for the state and its residents — its community, which was, after all, the reason why the state subsidized the damn thing in the first place — even as it is good policy for the university.

To which one can say, well, the problem here is to raise the tuition price to fully capture to cost, and then let the university choose.  But that’s a good policy only if one assumes that a public university, founded by a state for the benefit of its society and economy, should be indifferent as to the members of that political community.  Which is to say, those that live there and lived there in the expectation of having some shot at attending the institution, and having a priority in that institution, as opposed to anywhere else.  I realize that many at public universities  (particularly the most elite that regard themselves as islands of cosmopolitan universalism in a sea of narrow and parochial people who regard being a resident — residing — living in a place for the long term) see such expectations related to actual place and actual community as precisely the problem.  But I don’t see that state legislatures, who presumably — even in California — are supposed to have some connection to place and resident community, should see it that way.

Price alone won’t do it, so long as the number of physical places is limited at the most elite schools.  That being the case, were I a state legislator in California, I would support very strictly limiting the ability of public universities to make decisions that are good for the university and bad for the state and its residents.  But in that case, be prepared for the loud and sententious backlash; the first rule of university relations with the wider world is that there is no policy in the financial self-interest of a university that will not be declared to be in accordance with Universal Virtue and the Greater Public Interest.  The University wants more money from a wider and higher paying pool; poof: it announces that its mission is to offer its services to the Global Community and to Men & Women Everywhere.  At whatever the global traffic will bear.
All true, and yet in the state flagships' difficulties are ways forward.  First, that "number of physical places is limited at the most elite schools" is true as a physical fact, but a meaningful constraint only to the extent that the most elite schools are perceived as better than the state flagships, where that perception sustains the price premium the Ivies and the like get away with.  The fact that ambitious students and cash-tight parents are willing to consider a Berkeley or Wisconsin or Illinois suggests there are limits to that price premium.  It is, however, up to the administrators at the flagships to provide the intellectual environment and the support for the high achievers in order to change the perception.  Second, the number of physical places is also limited at the land grants and the flagships: thus being one of Illinois's rejects at Northern Illinois or one of Wisconsin's rejects at Milwaukee doesn't mean the same thing it once did (if it ever did: models of pooling and separating equilibria in signalling models are notoriously difficult to test empirically).  Third, the notion, commmon among legislators, of turning university graduates into future taxpayers is a notion subject to review.  Think of it as Wisconsin or Illinois running a trade surplus with New Jersey, or with China.

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