Using the data and your own economic knowledge, assess the case for financing
universities mainly through charging fees to their students. (25 marks)
Education is a merit good, meaning that it has greater marginal social benefits than marginal
private benefits and creates positive externalities in consumption, benefiting third parties outside
and past it's consumption. In the free market merit goods are generally under consumed due to
imperfect information, which is a form of market failure. In the case of education, the
government intervenes at lower levels in order to make sure provision is sustained for all,
however at university level subsidies are reduced, and despite financial support for students,
higher education still comes at a cost.
It can be argued that where universities are left to the free market, efficiency is increased,
because there is more competition and ‘fee income provides the best way of financing the
growth of higher education’. Universities that are in the most demand like Oxford or Cambridge
can charge higher fees, and where they are demand inelastic, this will hardly change the
demand for them with a change in price. As different universities charge different fees, this will
create a signalling function, and thus resources will be allocated more efficiently, attracting
resources towards more popular universities. It could however be argued that this will create
inequality, because some people may not be able to afford higher fees and may go to a more
affordable university, which is now worse because it's resources have been directed towards
popular universities.
In addition, it could be argued that student’s paying for their education will improve it's quality for
a few reasons. If they have taken on this massive financial burden, they will be more likely to
work hard and make it worthwhile. It is important to consider that the maximum tuition fee is little
over £9000, but ‘the average graduate earns £160,000 more over a lifetime than a non-
graduate’ and thus it is an investment for students, with a large return which should make the
idea of higher fees easier to swallow. Quality of tuition will also improve as universities will have
to compete to attract students, in turn becoming more efficient, so in the long run they could be
able to provide lower fees or improve the quality of tuition. One downside of this though is that
this good quality tuition may be exclusive to popular universities, meaning it has no close
substitutes, and thus the demand will still increase, and fees will likely get even higher.
On the other hand, it could be argued that government intervention would be beneficial in the
provision of higher education. As a merit good ‘education is a good that markets tend to under-
provide’ and market decisions only account for private costs and benefits, whilst positive
externalities like tax revenue generated by high-earning graduates brings social benefits, which
are often unaccounted for in the free market. Government funding will incentivise university as it
is cheaper, and thus increase the consumption of education and enough resources will be
allocated to universities to meet the social optimum.
Finally, government intervention will also be more equitable, as education is considered a
necessity like healthcare in the UK, and thus it is important for all to be able to access it. Poorer
people may be deterred from going to university with higher fees, creating inequality. This may
