The recent discussion in California community colleges about the possibility of charging higher prices for courses in high demand pushes us to put our economists’ hats on to gain some perspective on this controversial idea. As state funding fails to keep up with enrollments in public colleges around the country, many states are struggling to meet the needs of students. Tuition levels have increased quite dramatically in recent years as institutions look for ways to replace the state revenues on which they have depended.
General tuition increases generate anger. But increases limited to specific courses seem to generate even more anger. Will low-income students be excluded from courses they need to graduate? Do we really want to ration access to high-demand courses through the price system?
It is not uncommon for schools to charge lab fees for science and studio art courses or to charge more for engineering programs, where the costs of providing education are significantly higher than in other fields. These price differentials are responses to supply side factors. Airlines raise their prices when fuel prices increase. McDonald’s is likely to raise the price of a Big Mac if they have to pay more for the beef (although not, we are assured, pink slime) that goes into the burgers.
But the issue now on the table relates to the demand side of the market. It’s not that freshman comp and introductory biology classes have become more expensive to provide. In fact, they have probably become cheaper as they are more often taught by adjuncts instead of regular members of the faculty. But left to its own devices, the market also generates higher prices when more people want a product that is in limited supply. Parents paid a fortune for Cabbage Patch dolls in the 1980s because every kid had to have one. Coca-Cola doesn’t actually cost more to produce than store-brand cola, but high levels of demand lead to higher prices. So if we allowed market forces to be in control, required courses would have higher price tags than electives. Is this price gouging – like charging more for snow shovels during a storm? Or is it a reasonable rationing mechanism?
What happens if you don’t respond to excess demand by raising the price? What can you do instead? And what kinds of tradeoffs do you face in deciding how to manage the students waiting for spaces? The range of options is really pretty limited. We can make people wait in line or we can develop a more systematic method of choosing among eager consumers. That might be through some evidence-based method for choosing those who either need the product most or have characteristics making them most likely to use it well. Or it might be through a lottery of some sort.
Bread lines were a familiar sight in Soviet-style economies. Raising the price of bread might seem unfair when people can barely afford it, but spending the day standing in line wasn’t very appealing either. Apple could no doubt sell the first hundred of the new edition of the iWhatever at each Apple store at a big premium; instead it invites people to get in line (producing sore backs, no doubt, but also welcome publicity). Sometimes people line up on a waiting list – until a season ticket holder dies intestate or until they come to the top of the list for a new liver. In the case of some nursing programs in public colleges, applicants may wait years to be admitted. An appealing feature of rationing by waiting is its egalitarian quality – nobody is buying favoritism (unless paying someone to wait in line for you is possible). On the down side, all that time spent in line is pure waste – time that could, for example be put to productive use earning the money to pay a premium price for the thing you’re waiting for. Many people die while waiting for new livers, and you and society will have fewer years to benefit from the investment you want to make in a nursing program if you have to wait 5 years to be admitted.
Instead of making people wait you can pick and choose among clients according to some characteristic you can measure. Rationing by need has a lot going for it in contexts where need can be well measured and has moral force. (Some people “need” to see the Yankees or the Bulls—but, you know, really?) Food, urgent medical care, basic education—these are all cases where rationing by need is familiar (although maybe not familiar enough). The allocation of additional services in schools to people with learning disabilities is a good example of a need-driven rationing method. When the thing being provided is a re-sellable commodity rather than a personal service, resale of the product, creation of black markets, etc., tend to develop and can undo the original intent.
A vocational program like nursing or a fancy college like Princeton may pick out people who performed well on some set of criteria. Well-chosen criteria can improve the effectiveness of a program if they succeed in picking out people who will benefit most from the program or whose future contributions will be most valuable. In some cases, the criteria may also induce desirable behaviors in potential clients as they struggle to meet the criteria. And if in fact the nursing programs turned out just the number of nurses needed to care for patients, turning some applicants away would probably be a better outcome than having them spend years training for a profession with too few job opportunities.
But if the criteria for rationing are ill-suited or arbitrary, then efforts to meet them are wasteful or even counterproductive. To take an example from the political realm, it’s easy to wonder whether the criteria for winning the race to become president of the United States align well with the criteria for being a good president. And we wouldn’t want to bet on the prospects for the marriage between a bachelorette and the contestant she chooses because of his appealing haircut.
Coin-flipping, or rationing by lottery, means awarding valuable commodities or services in purely random fashion as a way of responding to excess demand without raising the price. Perhaps the biggest advantage of allocating a resource by lot is that it eliminates the waste involved in waiting in line. Magnet schools frequently run lotteries to determine which students will have a chance to enroll. We can’t really make children wait a few years to start first grade, and there are lots of drawbacks to allocating the places in the best public schools to the children who have had the best opportunities to prepare for placement exams before their 5th birthdays.
It’s not always easy to draw a clear line between a lottery and an allocation based on characteristics. Many Ivy League colleges accepted fewer than 10 percent of their applicants this year. It’s easy to believe that a significant portion of the applicants were rejected because they didn’t meet the standards. But it’s hard to believe that the choice between the bottom 20 percent of those accepted and the best of the students who were rejected was really anything more than a lottery.
So back to those community-college courses. We could fund the institutions better so they could offer enough sections of the necessary courses. We could raise the price for all courses for all students. Or we can ration. But just saying no to a price hike doesn’t settle the question: some process will determine who will get the sought after prize, and you need to figure out what that process will be.
Anytime you face an excess demand and select some system for deciding who will get the scarce good, you would do well to think through what behaviors that system will induce among the clients and who will wind up getting the stuff, and to make some judgments about the merits of allocating things that way.