What good is a university education?

What good is a university? Economists think a lot about goods, and the classifications of them can shed some light on the present state of Irish higher education.

We can think about goods in several ways.  All are useful.

One way is how the consumption of them changes as their price changes. Usually this is hypothesized to be a negative relationship – normal goods tend to be consumed less as they become more expensive. It was this that led to the very laudable aim of increasing the participation rate of lower socioeconomic classes by abolishing university fees. The problem was that goods are rarely consumed in isolation. In this case the effect seems have backfired as the costs foregone by parents of were then transferred to grind schools and other approaches to boost points in the leaving cert, resulting in no real change.  We can however have the other effect. In some cases we have what are called Veblen or Snob goods – as their price rises their consumption increases. Elite education is in some ways a Veblen good. A key characteristic of a Veblen good is that the possession of it confers status. Thus not all MBAs for example are the same – an MBA from an Ivy League school or INSEAD confers more status than any MBA from any institution in Ireland. – Then we can think of how consumption of good changes as income changes.  Inferior goods are those whose consumption rises as income falls. One might consider some forms of online education an inferior good; if you cannot afford to attend college you can go online. This is not to say that these goods are inferior in a quality sense – the term is a technical one.

We can also think of goods along other approaches. One that is frequently used is to classify goods as to whether there is rivalry in consumption and whether the goods consumption is excludable. Excludability means a good that can be ring-fenced from consumption from those that don’t pay for it.  Views of the exterior of the TCD library are non-excludable, but those of the Long Room are excludable. Anyone passing can see the exterior, but the interior access is limited to those that pay a fee.  Rivalry is the issue of how many can consume the good. My enjoyment of a painting in the gallery does not prevent you enjoying it. My enjoyment of a slice of cake in the gallery café does prevent you from enjoying it.  We can thus think of four types of goods corresponding to the situation below


So what of a university education?

First, is it excludable? Within fairly strict limits consumption of college, that is attaining a degree, is financially excludable. If you do not pay for it you do not get it. We can remove this barrier by making it free, but then we have an issue of how to pay for its cost of production. If it is not paid for it it is not created. If Ireland does not pay for college education then we cannot consume it.

Second, again within some limits, there is some rivalry in consumption. There are barriers to consumption.  Space is limited on campuses and there are limits to how large a class can be before it becomes in effect online. Note that this is not a hard barrier. Properly designed and resourced even ultra large classes of certain types (4000 persons in a section anyone…) can work. In the short and medium run there are limits however.  Congestion takes place beyond a certain level and this congestion induces rivalry.    Beyond a certain limit one additional student added to a class or a section reduces the consumption of college education, first in its quality and then absolutely. We might therefore conclude that a college education is, in realistic terms, mildly rivalous and mildly excludable. It sits somewhere in the middle of the matrix sharing elements of a private and a club good.  Therein lies the problem of funding.  Ideology does not come into it when we state that under reasonable conditions a market mechanism will best provide the private good element; the club good element requires a decision on where congestion happens and then a decision on who pays.

Part of the problem in the financing of college education comes about because university education (the process) and increased skills and knowledge in society (the output) get confused.  A better-educated society is non-excludable; I can enjoy the benefits of the vast increase in human knowledge without paying for it. And it’s mostly non – rivalous. My enjoyment of the increase in knowledge doesn’t prevent you from so enjoying also. A well-educated society, which is one outcome of more university education, is a good which is somewhere between a common pool good and a public good. And herein lies the problem. Common pool goods tend to be over consumed and under produced.  Think of overfishing or overgrazing on communal land. Public goods are generally overused also and are particularly subject to free riding. University based production of knowledge, which is then appropriated, and IP bound by private corporations is one example. This is usually quite legal, due to blurred legal lines in relation to ownership of such IP. If you think this is a trivial problem read this, and note the affiliations of the authors…

In the argument on university funding therefore we need to think hard about the problem we want to solve. Do we want to solve the issue of greater knowledge? In that case, we have to accept that subsidies and state intervention to solve the market failures inherent in public goods and common goods are solutions. If we want to solve the issue of greater participation then we need to determine the extent to which we see university education as a club good and a private good. To date we have not addressed this problem in the debate in Ireland.

A further split that is relevant is between what are called credence and (post) experience goods. Experience goods are goods whose real value becomes apparent only after they are purchased or consumed. This is in contrast to the regular type of good which is called a search good, and whose benefits can be fairly well known by diligent search. University education has elements of both of these. We can find out the job prospects for a degree class, we can find out the average salaries of graduates, we can find out information on lots of things. But we can really only know how useful the degree is to us after we have taken it. That may take a lot of time. That there is a real issue is seen in the controversy around the comments by Paddy Cosgrove on TCD vs other degrees The question then is how to ‘price’ these goods. When we don’t have the full experience, we have a problem. The challenge for universities is that branding and full disclosure of relevant information on teaching quality, class contact, the human and developmental side of the education process that often remains opaque; this transforms a good from an experience to a search good. Search goods are inherently more subject to commercial pressure and to commoditization. This is exactly what elite universities don’t want, hence the perhaps unconscious efforts to keep much hidden from the potential consumer. It may even be that the benefits of university education are so difficult to measure that the good moves from an experience to credence good. These are seen to be valuable because they are seen to be valuable. This allows us to see them displaying behaviour similar to that of the snob or Veblen good noted earlier. This arises because in the absence of any other information the only thing people have to go on is price. A high price is seen as information that this must be valuable and valued (by someone…somewhere).  The experience of the fee deregulation in the UK universities sector holds a warning. Where there is a lack of effective regulation the cost to the consumer of these goods converges as between high and low quality. The producers of lower quality goods overcharge as first no consumer knows the true value, second there is lack of regulation to force information flow and third the good has the characteristic that price is the only signal. The existence of competitive pressures acts to cap the price charged by the high quality producer. Thus, every university in the UK, more or less, charges the same price for its undergraduate education. What of the other product, university generated knowledge?  It is almost certainly at least an experience good.

The pricing, that is the cost structure, of experience and credence goods is an area of complex economic thinking and one to which we might return later. However, some recent work suggests that market approaches to delivering credence goods may not give good outcomes, and in fact can result in a much more costly delivery. Fraud and misstatement of quality also increases under price driven competitive delivery of credence goods.  Thus pushing to a greater degree of market and private involvement in university research and degree delivery may not be a good idea.

Overall the debate on higher education delivery in Ireland could benefit from greater economic input. Much of the debate on the usefulness or otherwise of economics has cantered around macroeconomics. Microeconomics, the study of goods and services, consumers and producers, has sailed on. Its claims are usually more modest, more technical and more difficult to distil into sound bites.

4 thoughts on “What good is a university education?

  1. Pingback: A collection of links to my posts on higher education | Brian M. Lucey

  2. Pingback: Ninth Level Ireland » Blog Archive » What good is a university education?

  3. angevf

    Very interesting piece, thanks. We should be increasingly worried about the positioning of education as a marketable commodity instead of as a public good, especially with trade agreements that are likely to inhibit states from more equitable and accessible provisions.
    A very interesting paper on this was given by David Robinson of the CAUThe at yesterday’s IFUT conference in Dublin.
    I’d love to read a similar analysis of your interpretation of heath and healthcare as a public good?

  4. Pingback: The Economic Logic of Student Loans (or, not..) | Brian M. Lucey

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