Students Learn the Hard Way
Subject Comparative statics and taxes and subsidies
Topic Equilibrium
Key Words Tuition, state funding, economy, tax revenues, budgets, recession, financial aid, loans, enrollments, subsidy, salaries, incentives, rebate, tax, discount
News Story

In most states, tuition is going up in four-year public universities. Most are in the single digits, but some are huge - freshmen at Texas A&M will pay 26 percent more, University of Kansas students 21 percent, and University of South Carolina students 17 percent. The culprit is reduced state funding. The weaker economy has decreased tax revenues, and so states have cut spending to balance their budgets. Higher education is easier to cut than K-12 and prisons because someone else can pick up the tab - students and their families. This is not easy, however, due to the recession. As a result, more and more students need financial aid and are requesting loans.

Certainly, student enrollments are growing due to the recession which has reduced job opportunities, but the extra tuition simply makes up for some of the lost state subsidy. Consequently, universities are reducing faculty and programs, freezing salaries, delaying capital projects, and increasing class size.

To relieve the burden, some universities are giving students incentives to complete their studies quickly. At Texas A&M, if a student takes no more than 3 credit hours more than the minimum required to graduate, they can receive a $1000 rebate after graduation. Meantime, Utah State guarantees that students can graduate within four years if they agree to certain stipulations, but if they take a class three times or enroll in 35 percent more classes than necessary, they are subject to a tax. The University of Oregon is giving a 15 percent discount to students who register for classes scheduled after 3 p.m. in order to decrease class sizes earlier in the day. Student governments are very concerned and are watching the quality of their education carefully.

(Updated October 10, 2002)


States are reducing their subsidies to higher education.
a) Draw a supply and demand diagram for the market for higher education. The axes should represent tuition rates and the number of students. Show how a per-student subsidy affects the equilibrium price and quantity of education. Also show the total revenue received by universities from subsidies and tuition.
b) Now show what happens to the equilibrium and total revenue received when the state decreases its subsidy.
c) Explain why programs and faculty are being cut.

2. Poor employment opportunities are inducing more people to enroll in universities.
a) On your diagram, show how this affects the equilibrium tuition and enrolment levels and the total revenue received by universities.
b) How has the composition of the revenue changed?
3. Discounts are being given at the University of Oregon if students enroll in later classes.
a) Draw a supply and demand diagram for classes after 3 p.m.
b) Show how the equilibrium changes when discounts are given.
4. Taxes are being levied at a number of schools if students enroll in classes beyond the minimum necessary to graduate.
a) In a diagram of the supply and demand for classes beyond the minimum, show the equilibrium tuition and enrollment levels.
b) Illustrate how the imposition of taxes affects tuition rates and causes students to respond.
Source Mary Beth Marklein, "Public universities raise tuition, fees - and ire," USA Today, August 8, 2002.

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