Why free university tuition doesn’t make economic sense

Who will pay? Shutterstock

Who should pay for higher education? This perennial question returned after the 2017 UK general election and Labour’s bold proposal to abolish student fees. To many, offering free university tuition to all will sound like a noble enterprise – but the reality is that it remains a political policy in search of an economic justification.

Two broad approaches currently dominate answers to this question. One, data-driven, quantifies how tuition fees and maintenance grants or loans affect demand for higher education (HE). The second considers fees philosophically and ideologically, based on beliefs about the nature of education as a “good” thing.

Neither approach examines fees holistically by asking whether or not, everything considered, fees are a price worth paying because they produce a better allocation of resources and improve social welfare. But Bipasa Datta and I have developed a framework for doing just this in the Journal of Public Economic Theory – and have found that there is no sound economic justification for free university tuition within this framework.

The route to this conclusion recognises that education is not a public good as economists understand the term. This is for two reasons. First, an education service is congestible: the more people who use it at a given level of investment in it, the lower they perceive its quality to be. Second, although several people can share an educational output, like a mathematics lecture, they will not always know their individual aptitudes or ability to benefit until they have actually attended it. These features must be incorporated into the analysis.

Who should pay?

To analyse how much education should be provided and who should pay for it in this context, we can suppose that education occurs over two periods: a “discovery” period, when people learn about their aptitude for education in compulsory schooling, and a “consolidation” period, when those revealed to be of high aptitude can benefit from HE.

In our analysis, we imagine that education can be supplied by one of two alternative sole providers, which fix the fees charged and the level of investment in the system. One is the private monopolist who is interested only in how much profit they can extract from “customers” – students or their parents. The alternative is the benevolent state system, which seeks to maximise social welfare and reinvest all fees obtained from students in the educational system.

The predictions that come out of our simple theoretical model are stark. The monopolist will always charge to supply education throughout both the discovery (school) and consolidation (university) periods. This follows directly from its pursuit of profits: it collects revenue from students while they are discovering their aptitude at school, knowing that it will subsequently lose as customers those without the skills to make it into university.

It doesn’t add up. Shutterstock

The state behaves very differently. A benevolent state wants to protect students whose experience in compulsory education convinces them that they do not have the aptitude to continue to HE. This protection can occur to such an extent that the state provides free education in the discovery period. It thereby indemnifies those unfortunate enough to turn out to be of low aptitude. In effect, the state offers free schooling so that those who lack the aptitude to go on to HE don’t have to pay to discover that fact.

But if state education is free for all in the discovery (school) period and the system has to break even, then the model shows that those with enough aptitude to benefit from HE must pay the full cost of the whole state education system. In essence, to achieve the right amount of redistribution in the system, they must pay “tuition fees” while state school children pay nothing. We have not calibrated our model to predict the optimal fee level, but the parallels between these theoretical predictions and the current UK educational system, whereby university students pay fees of up to £9,250 a year, are uncanny.

Further results show that a monopoly education provider is likely to admit fewer students to HE, but will offer an excessively high quality education to those admitted. This occurs because the monopolist is likely to charge higher student fees and deter more students from HE than the state system. And also because having fewer students in HE results in less congestion and hence higher perceived quality of any given level of facilities provided in HE.

Breaking even

Some would argue that the educational system should not have to break even. But if that is the case, a state-organised regime has to raise funds from elsewhere. One possibility would be to tax other goods to finance HE. But this conflicts with the desire to redistribute income and opportunity that leads the government providing free education during the discovery period to improve the position of those with low aptitude relative to those with high aptitude.

Asking the low aptitude people who don’t go on to HE to pay tax on other goods to subsidise HE would raise the price and lower the quantity of these goods that everyone, including the poorest, would consume. Are those who do not benefit prepared to pay for others’ education? In fact, were tuition fees not entirely dedicated to paying for education in our analysis, the government might wish to redistribute some of those fees to those who do not enter HE.

Supporters of HE free of tuition fees ignore that education occurs over a long period. The groundwork for HE is laid during students’ early experience in compulsory education. This is when government can and should subsidise the system.

Politics is littered with totemic policies such as “right to buy” and “help to buy” that proponents stand by even when offered evidence of their deleterious consequences. The proposal to abolish tuition fees is seen widely as Labour’s masterstroke during the 2017 election. But many, maybe most, economists would not agree with it. Perhaps that’s not surprising. To misquote a famous politician: “Politics is not economics, stupid!”