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In the article Why subsidise tertiary education? we established that tuition subsidies are generally provided by governments in recognition of other benefits that accrue to society more generally. It is reasonable to assume that public benefits are related to the volume of education received - longer periods of study result in greater public benefits (although there are issues with this assumption).

However, there is a related issue: Do these benefits accrue to each educational course on the same basis irrespective of course content, or do public benefits vary from course to course?

It is not clear that the kinds of public benefits that arise from tertiary education (such as a participatory democracy, reduced dependance on public services, a highly developed sense of culture and community and a dynamic economy) are at all related to the type of study. Is educating a doctor (medicine tends to be a high cost course) more likely to result in these benefits than training a mathematician?

Public benefits accrue because the student has chosen to acquire a tertiary education. WIth subsidies, the costs of study are lower and more students will participate, so the level of participation in tertiary education is a key determinant of the size of public benefits that will accrue. The level of the subsidy in relation to course costs will be a factor in determining course choice and also in the student's decision to participate or not participate. Since some courses are more costly than others (due to teaching, practicum, and technology requirements) the amount of the subsidy the student receives may be very important to overall total public benefits.

Tertiary education is, however, also important to labour markets. Subsidy design will influence patterns of skill formation and there are risks that subsidies will distort labour market rewards and under or over supply of skills in certain areas.

The four basic approaches that have been taken to subsidy design are:

* Flat fee. The student's subsidy is designed to result in a standard tuition fee paid by every student.

* Subsidies in relation to estimated future private benefits. The subsidies provided are higher in proportion to course cost for courses with lower labour market returns, and lower for courses that result in higher labour market returns.

* Subsidies in proportion to cost. The subsidies are a proportion of the estimated cost of a course (normally with courses allocated to broad course categories).

* Flat subsidy irrespective of course type.

These basic approaches to subsidy design can be analysed in terms of their impacts on student participation patterns, the behaviour of education providers, impacts on labour market skill supply and remuneration structures, and the likely public benefits that would result from subsidies.

The flat fee arrangement has the advantage of making a student' choice of course unrelated to cost. However, this is likely to result in higher enrolments in high-cost courses than labour market skills demand would warrant. Since fees would need to be regulated this would have a significant effect on provider behaviour, with reduced incentives for providers to lower cost or increase the quality of education provided.

Providing subsidies in relation to estimated future private benefits is an interesting approach approximating the higher education tuition subsidy arrangements in Australia. Fees would need to be regulated, as in the flat fee arrangement. The same issues arise with respect to provider behaviour. This approach is also likely to distort skills supply since demand for courses will be shaped by fee levels which bear no relation to labour market demand or cost of study. Changes to labour market remuneration patterns woud inevitably result over the longer term.

Providing subsidies in proportion to course costs is the most common approach. This results in proportionately higher fees for higher cost courses. Pricing signals, therefore, reflect underlying course costs. Students are likely to choose courses in much the same way as if no subsidy was provided since they would continue to take cost relativities into account. Labour market skills supply will be reasonably balanced with remuneration to some extent reflecting higher course costs.

The flat subsidy arrangement has a number of attractions since on first glance it would appear that public benefits have no direct relationship with course costs. In addition a flat subsidy is likely to have the least impact on labour market remuneration arrangements and normal provider behaviour. However, if student participation behaviour is sensitive to tuition fees (it is generally thought not to be except in the case of students from low socio-economic backgrounds) then this may result in students selecting lower cost courses with resultant negative impacts on labour market skills supply. A practical problem with a flat subsidy is that with high levels of subsidy it is possible to over-subsidise some courses. This would be inefficient.

In conclusion, while it is not clear that public benefits are likely to be higher for higher cost courses, the impacts of subsidies on levels of participation and the relationships between education and labour market operation are such that a flat subsidy arrangement may actually be sub-optimal. Most systems have subsidies roughly in proportion to course delivery costs.

This article Copyright 2000 Mike Woods MPP BSc DipTchg, Mike Woods & Associates

Posted by Mike Woods at January 04, 2002 08:53 PM

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Copyright 2002 Mike Woods & Associates