University College Tilburg

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Successful and Inclusive Education: An Economist’s View

Author: Gerwin van der Laan - program director Business and Economics at University College Tilburg

Choices often affect third parties. If shipping companies put effort into securing containers, society enjoys fewer costs of cleaning up oceans when winds no longer wash containers overboard. If students put effort into preparing for tutorials, the entire class enjoys the benefits of higher-level discussions. If employers relax working hours, an economic region enjoys the benefits of reduced congestion. Economists have concerned themselves with these so-called externalities ever since Arthur Pigou introduced the term in 1920.

Externalities arise when someone does not enjoy the full benefits or does not bear the full costs of his/her decisions. Securing containers lengthens the time a ship harbors – a cost fully borne by shipping companies. The benefits of secured containers accrue to all those affected by containers going overboard. As the social benefits exceed the private benefits, the shipping company underinvests in securing containers. Conversely, smokers do not bear the social costs of second-hand smoke, and thus light too many cigarettes.

The economist’s solution to externalities is to ensure that the price includes the social costs and benefits. Taxes on cigarettes raise the cost of smoking and should reduce cigarette consumption towards the social optimum. Subsidizing port dues reduces the costs of harboring a ship, and should make securing containers more attractive.

Externalities and Two-Step Choices

An interesting case is the Dutch government’s subsidy on plug-in hybrid electric vehicles (PHEV) – cars with an electric engine and a traditional combustion engine. Subsidizing the PHEV market led to a surge in the sales of such cars. However, having bought a PHEV, drivers still face the choice whether or not to charge the vehicle or to feed it fossil fuels. Although electricity is cheaper than petrol, it takes a lot of time to charge batteries and many drivers put the electric engine to rest. Having bought a subsidized PHEV, the relative prices of its use were not affected sufficiently.

Universities face conceptually similar issues. Education needs to be opened up to those who would traditionally not seek university degrees. In keeping with the University College Tilburg vision, we do not charge higher tuition fees and are thus as (un)affordable as other programs. Setting lower tuition fees, while ensuring inclusiveness, distorts relative prices. Board years, side jobs, internships and travelling become more worthwhile when tuition fees are subsidized. Of course, all these activities contribute to students’ personal development and are valuable as such.

Addressing Externalities in Education

Universities are thus torn between two lovers: students do not bear all the costs of their university training and Pigou would propose to reduce subsidies on tuition fees such that social costs and benefits are reflected in the price. If effective, however, the lobby would compromise universities’ ambition to be inclusive. Is it possible to tackle positive and negative externalities at once?

If tuition fees both reflect the social costs and benefits of education and ensure accessibility, the externality would be addressed without compromising success rates. The recent initiative to charge students per course rather than per year may be a starting point. Allow me a thought experiment with remotely realistic numbers. Students currently pay 2.000 euros per academic year, and take ten courses. If the true costs of these ten courses are around 9.000 euros, institutions could charge 900 euros per course. To ensure accessibility, students receive a 7.000 euro allowance for a one year program. A student taking all ten courses would end up paying the same tuition fee. A student who decides to take only 6 courses, pays 5.400 euros out of his/her allowance and leaves the remaining courses (and allowance) for future years. At the course level, an economist would predict success rates to go up.

A system in which students receive a substantial study allowance and pay substantial course fees is more transparent than direct government funding. It promotes participation in higher education and thus addresses the positive externality problem. However, it does so without distorting the relative price of seeking a university degree. So: let us support those who call for more generous scholarships, but contribute higher per-course tuition fees. Let us support those who call on students not to delay their studies, but contribute flexible tuition fees. Inclusiveness and study success can go hand in hand.