Conclusiones

Universities are highly regulated, largely not-for-profit, busi-nesses. They are subject to politically motivated price ceilings, which are also intended to limit the opportunities for moral haz-ard that arise from the income-contingent loan system. However, a combination of the cost disease, the arms race for prestige and

16 As universities are ‘schools’, you might expect them to be judged on their teaching and learning. However, the main international league tables, such as the one pro-duced by the Times Higher or the World Ranking of Universities, rely most heavily on measures of research performance.

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the perception that a university’s quality is reflected in its fees combine to render price controls largely futile.

What seems irrational behaviour on the part of universities – expanding student numbers at a price vice-chancellors claim is below costs – turns out not to be so mysterious after all. The

‘costs’ to which they refer include research subsidies. Any price ceiling for university fees will always be below ‘costs’ because research expenditures have no limit.

In reality, the marginal cost of an additional student in most subjects is low; it is not hard to squeeze another undergraduate into a lecture theatre. Some elite universities are happy to expand the enrolments of high-performing students because these stu-dents bring greater prestige. Lower-ranked institutions are also happy to expand enrolments. Their students may have less stellar A-level marks than those attracted to the elite universities, but they bring funds that can be used to fuel the battle for prestige.

History has shown that university price controls have not kept prices from rising. Eliminating price ceilings and quotas for home and EU students would produce market-related price and quality differentiation, just as it has for non-EU students. Recog-nising this, the Australian government announced in May 2014 that it would seek parliamentary approval to lift all price con-trols on domestic student fees while making income-contingent loans available to any home student admitted by a university (as noted above, quotas had already been lifted).

With no quotas and no price ceilings, Australian universities will be able to enrol as many domestic students as they wish and charge whatever price they can get away with. Because higher education is a Veblen good and the government provides loans to all students, elite universities will have the opportunity to benefit at taxpayers’ expense. Modestly ranked universities, on the other hand, may succumb to moral hazard and admit unprepared stu-dents whose fees they get to keep even if graduates never make enough money to repay their loans.

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To prevent price gouging and unrestrained admissions, uni-versities must be made to bear at least some of the risk of unpaid loans. They could, for example, be required to repay a proportion of the unpaid loans of their graduates.

To make students more price-sensitive, income-contingent loans should not be written off after 30 years and attempts should be made to recover them from deceased estates. Serious attempts should also be made to recover debts from students who leave the country – if not while they are abroad than when they return home. Passport checks should be able to achieve this.

As this chapter is being written, a hostile Australian parlia-ment is preparing to reject the lifting of university price controls (at least for now). Because the Australian government did not propose the parallel changes to the loan system suggested above, it may end up thankful that it did not get what it wished for.

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