Wednesday, February 20, 2008

Supply, Demand and Subsidies

Imagine for a moment that you produce a product. Your product is not only popular, some would even consider it necessary. There is no practical regulation on what you charge for your product. Now, imagine that the popularity/necessity of your product convinces politicians that they should make it easier for people to buy your product through subsidies. Yet, there are still no regulations on what you charge. Would you raise your prices?

This is simple economics. A presidential candidate promises that the government will provide everyone who wants to buy your product a $4,000 subsidy every year in order to make it easier to purchase your product. Would you raise your prices?

After all, there's more money available to buy your product. In fact, there are billions of dollars in subsidies made available in taxpayer supplied grants, cheap loans and other methods to make it easier to buy your product. Oh, by the way, you don't have to pay taxes on what you bring in. Would you raise your prices?

Simple economics tell us that if there is more money available to buy a specific product then the price for that product will rise if there is no pricing regulation.

Welcome to the world of higher education in the United States. The producers (the universities) are free to set whatever price they want. As costs go higher, politicians fall all over themselves to throw more money to the consumer to make it easier to buy the product. How can anyone be surprised that the price of the product continues to rise?

Now the worst of it. Many of the private institutions have billions of dollars in cash and are earning tremendous sums of tax-free money on their cash. Yet, with all the cash the private universities have, you, the taxpayer, continue to subsidize other people so they can go to those schools. These schools continue to raise their prices because of all the subsidies that you, the taxpayer, continue to lavish upon them.

Will this change? Can this change? Perhaps it has started to change. Stanford's endowment grew last year by 22% to $17.1 billion. Stanford is now dropping tuition charges for students who come from families earning less than $100,000 per year.

Stanford deserves a round of applause for this first move.

The institution of higher-learning in this country, however, deserves continued, increasing pressure regarding their pricing as long as taxpayers subsidize their products. Personally, I think the universities should charge whatever they want for tuition. But I also think I shouldn't have to subsidize their consumers so they can afford whatever outrageous price the universities choose.

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