Back to School

An earnest young lady named Esther
Was beginning her freshman semester,
And her greatest concern,
In preparing to learn,
Was that school would financially test 'er.

Everybody complains about the high cost of a college education, but nobody does anything about it. Now, at least, one man has put forward a microeconomic explanation. Kenneth Gould lays out an intriguing price discrimination argument in the American Enterprise Institute's online magazine.*

Gould's point is that the financial aid system allows the providers (colleges) to learn how much the consumers (students) are willing and able to pay, and thus practice first-degree price discrimination using financial aid to set different prices for the same service (education).

First degree price discrimination occurs when normal markets are interfered with and producers are allowed to learn exactly what each consumer is willing and able to pay for the good or service. Using this data, all the producers set individual prices for each consumer, eliminating competition and forcing the consumers that are willing and able to pay a higher price to pay it. In this pricing scheme, those who are willing and able to pay only a lower price get a break. ... As it turns out, this seemingly humane aim has a fundamental flaw — the same flaw that afflicts all non-market based systems: When producers no longer need to compete, production costs always rise faster than they otherwise would.

*Note to reader: the word "intriguing", when used in this space, refers to an argument with which the writer potentially agrees but must regard skeptically on political grounds.