What about public goods in higher education?

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The current edition of the OECD’s Education at a Glance, published on 13 September, noted that in 2014, only 28 per cent of the financing of all tertiary education in UK was from public sources, with 72 per cent from private sources, mostly from students. This was the lowest share of public financing in all 33 OECD countries for which figures were available.

The exceptionally high level of tuition fees in England makes the funding system vulnerable to the accusation that graduates pay too much. At the same time, it can be argued that the public is paying too little, and that over time this will lead to neglect of the common and collective goods derived from England’s university and college infrastructure. The debate about the extent to which university education is public good is conspicuously missing from much of the current, increasingly heated, debate on tuition fees.

Existing public subsidies

It is likely that the OECD 28 per cent ratio underestimates the extent of public subsidies in higher education (as distinct from all tertiary education). In England, the government provides a considerable indirect public subsidy through the underwriting of that part of tuition debt that will never be paid. Some graduates will never earn enough to trigger the income threshold for repayments through the tax system and most will pay back only part of their loans before it is written off. Calculations of this subsidy vary from time to time but it is currently estimated at about 35 per cent of the cost of higher education.

This indirect funding helps to make higher education more accessible, an important public good. However, the idea underpinning this funding system is that the public goods created in higher education primarily boil down to the provision of broad individual opportunity, that is, access to higher education as an individual private good.

Some direct subsidies (grants paid via HEFCE) survived the 2012 reforms,  in science-based disciplines that are studied by two students in five, on grounds that these courses cost more to provide, or that they create benefits to the country as a whole that are not captured by the graduates as private earnings. However, for 18 per cent of STEM students the direct subsidy is negligible – only £255 a year – and for another 20 per cent it is low at £1,527. Only in clinical medicine and dentistry, at £10,180 a year, is the direct subsidy big enough to change the character of financing but just 2 per cent of students are enrolled in clinical medicine and dentistry.

What about public goods?

In economic terms, public goods in higher education are those goods that cannot be produced in an economic market because is not profitable to so produce them. They might be goods at the individual level, such as a graduate’s more discriminating understanding of culture. This is a lifelong benefit to the graduate but it is not rewarded in the graduate labour market through higher wages, and so cannot be effectively sold as an economic commodity. Or they can be goods at the collective level, such as most of the new knowledge created by research, and the positive effects of higher education on social tolerance, which is well attested in research.

But other public goods, generally collective in character – or as the economist would say, ‘jointly consumed’ – are negatively affected by an undue focus on higher education as a private good. These collective goods are vulnerable because they are not captured in augmented private earnings, and do not necessarily spill over as public goods from investment in higher education as a private good. For example:

  1. The many contributions of higher education institutions to building society, economy and education in cities and regions, especially disadvantaged regions. This is an important contribution of UK HEIs that is valued in policy;
  2. The public cultural contributions of universities through performances and training opportunities in the arts, publishing and so on. This is an especially important function of some regional universities (overlapping with point 1, above);
  3. Universities’ extra-mural education activities in the community;
  4. At least some of the voluntary contributions of the universities to better public policy and government processes, which require time and other resources. There are also many voluntary contributions in civil society, and in relation to industry;
  5. All cross-border international activities in universities that are not covered by research funding or financed from foreign student fees, and contribute to building social learning, a more capable workforce (which may or may not show in higher wages), better international relations, and global public goods. This includes the cost of study abroad for many students.
  6. Last and by no means least, the reproduction and advance of all academic fields of knowledge, not only those fields that lead to professional qualifications generating specific earnings, and not only those in the STEM disciplines. The classic examples are foreign languages and other humanities, which have many public good spin-offs but are low valued as individual investment. Arguably, also, some STEM disciplines such as mathematics and the non-professional ‘pure’ scientific disciplines are not adequately subsidised as knowledge, yet are crucial resources for learning, research and social institutions in many other domains.

In relation to the disciplines the concern is that funding them entirely through student tuition fees, with the selected exception of STEM, leads to a sub-optimal provision of knowledge – its creation and reproduction – overall. It could be argued that under the present tuition regime in England, non vocational ‘liberal arts’ such as the humanities and pure mathematics are subsidised on the demand side, in that graduates from non-vocational programmes with relatively low earnings will pay back less of their student loans. However, universities respond to supply side as well as demand side incentives with supply side incentives often decisive. Without direct funding for these disciplines there is less incentive to provide them, and in the long run it is inevitable that they will lose ground.

If higher education institutions follow the logic of the consumer market and the Teaching Excellence Framework as the government wants them to do, over time unfinanced public goods (1-6 above and beyond) will be whittled away. The TEF requires institutions to focus on maximising individual student satisfaction scores and individual employability. This requires England’s universities to target more precisely their spending and activities to maximise performance as measured by the TEF indicators. In other words, the more the university neglects extraneous unfunded public goods such its contributions to the local region, the more ‘effective’ it will become.

There is no guarantee that these unfunded collective public goods will be cross-subsidised from other revenues. It is unrealistic to expect international students’ fees to sustain all university activities around region- and city-building, liberal arts and sciences,cultural contributions of universities, extension programmes, and a broad range of cross-border contributions.  International students’ fees already play a crucial role in supplementing research costs and might have to do even more work here, if Brexit cuts UK access to the European research grant schemes that are crucial to university research budgets.

What should be done?

If we accept that there are public goods arising from universities’ activities, then there’s an argument for more direct subsidies from the taxpayer. But how should this be achieved? Should policy aim for a specific balance between public and private funding, based on a calculation of the public/private split of benefits? This would be unwise. There is no sound basis for such a calculation.

The question about a normative public/private balance, which could never be agreed, let alone policy stable, is the wrong question. The better question to ask is: ‘what are the funding arrangements that will optimise each of the public and private benefits of higher education, within a defensible fiscal envelope?’ What is the most appropriate combination of private charges and public subsidies and how should each be directed?

As well as direct subsidies, there might also be a reduction in student tuition fees. The policy question in relation to tuition fees, though not the main subject of this article, is: ‘what level of tuition fees will optimise the private benefits of higher education, and their distribution, while sustaining access and other public goods?’ To the extent even income contingent debt has deterrent effects, discouraging participation, that level is less than £9,250 a year. It is notable that high fees reduce both the net private benefits and the public benefits of higher education.

5 thoughts on “What about public goods in higher education?”

  1. An economist says:

    You should be referring to positive externalities rather than public goods

  2. Dr Seanie Finneran says:

    If it’s a public good it should be free at at the point of use and delivery, funded via a progressive tax system in which richer people and corporations, i.e. the beneficiaries of any private boost, pay relatively more.
    Time to ditch the pernicious Aussie system that we blindly appropriated and return back to European social democracy before we leave Europe.

  3. I don’t have the answer, but it is a very good question. Systems which do not charge fees to students don’t work well outside the Nordic countries, and some are very poor indeed, but the jump in England from 3K to 9K has never been properly justified.

  4. Kimmo Kuortti says:

    And it does not work entirely without tuition fees even in the Nordic countries any more

  5. Darryll Bravenboer says:

    It is entirely legitimate to debate where the balance should be struck between private and public higher education goods but the discussion may not be adequately framed by reference to individual and/or state contributions alone. On the one hand it seems irrefutable that higher education is a positional good that can have individual (private) benefits (salary, job etc) and that the ‘service’ that supports the realisation of this benefit can be traded as a commodity. On the other hand, there are also, and at the same time, collective public goods (or externalities if we must) that result from living in more highly educated groups or societies. These might include higher levels of production, lower levels of crime, higher democratic participation, increased social mobility and cohesion etc. The rationale for the tuition fees rise put by Browne emphasised individual (private) benefit and interesting explicitly excluded employer contributions as this was seen to conflict with ‘students being at the heart of the system’. However, the advent of the apprenticeship levy (a tax for large employers) and degree apprenticeships, already provides a new model that at least challenges the emphasis on higher education as an individual private good alone. Here there is also public support (largely predicated on increasing national productivity) for smaller employers of state funding for 90%+ of the fees. There also seem likely to be other wider public goods that result from more people accessing higher education through the degree apprenticeship route as numbers increase. The public sector in particular will benefit when police officers, nurses, teachers and social workers achieve their professional status through degree apprenticeships all paid for (in one way or another) by public sector employers from the public purse.

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