The Unseen Cost of University Tuition

Drawing on Frederic Bastiat, one of the most important lessons that Henry Hazlitt imports in “Economics in One Lesson” is to focus not only on the visible effects of an action – the unseen are often times more important. In few places is this more important than in education funding.

University education has come to be seen as the textbook example of a good in need of public expenditure. The positive externalities of education – under the pretence that an educated populace is the preferred populace – imply that the government should compensate the educated for the benefits they reap upon us all. Indeed, opening almost any introductory economics text reveals the same examples. Filthy steel mills that need to be taxed to disincentive the production of their negative externalities, and poor yet educated students that need to be compensated to incentive the production of their positive externalities.

Yet what of the unseen effects? While learning the economics of externalities, students are generally aware o f some of the unseen effects of policies that promote or mitigate them. The concept of the deadweight loss – those ubiquitous triangles caused by interventions that distort the market – are colourfully illustrated in every introductory economic course. Students realise that taxes nearly always result in a reduction of total wellbeing that the market can provide, and otherwise stop interested parties from engaging in welfare enhancing trade.

When externalities enter the picture, this caution is mostly thrown into the wind. Negative externalities can be cured through taxes, and positive externalities can be promoted through subsidies (never mind that these must be paid for by, in most cases, taxes).

With the recent hullabaloo in Quebec over proposed tuition hikes, one gets the feeling that there is a different economic fallacy at play.

Every introductory economics student learns that the cost of something is the foregone alternative. One implication of this lesson leads to the second great lesson of economics – there is no such thing as a free lunch. Whenever a good or service is provided it must be paid for.

University tuition in Canada is a good case in point. Students are often led to believe that University is costless (or nearly so) since they do not pay the full cost of tuition out of their pocket. Actually, the cost is still there, it is only a matter of who pays for it. Students can defer the cost of their education, but they cannot avoid paying it.

That someone that pays their tuition is the taxpayer, someone that they will hopefully be one day. While students enjoy a relatively low-price education for four years, the reality sets in soon thereafter. Taxes are relatively higher to fund this University system – your take-home pay will be that much smaller as a result. Students assume they get a free lunch for four years, but the real cost is a higher average tax rate for the rest of their lives. Four years of “free tuition” seems like a short ride in comparison to the next fifty some odd years they will contribute to the system.

The actual cost doesn’t stop there. Cost is the foregone alternative, therefore we need to know what would have been done with that income if it was take-home pay, and not filling Ottawa’s, or Quebec’s or whatever province’s tax coffers. For some students, it might only be one drink less in the bar for the rest of their lives – a good trade-off one might conclude.

For others it might mean less money contributed to their registered or unregistered savings plan. The cost here manifests in two ways. The most obvious way is through a reduced retirement allowance when the time comes. Living the high life when one is young might result in a bill to be paid in old age if it implies less money is available for retirement than was originally reckoned. Another way is to look at what that invested money would have done over the worker’s life. Businesses rely on our hard-earned savings to fund their investments today. A reduction in savings translates into less funding for business investment. Less business investment implies less job opportunities, or fewer goods created to satisfy our wants and desires.  An infinite regress of negative feedbacks could be thought of, all stemming from a reduction in investment because taxes were that much higher, all to fund a University system today.

This is not to say that higher education doesn’t have positive externalities to it, or that uninterested parties do not benefit from some strangers bettering themselves in such a way. As I type this out on Microsoft Word I am reminded that Bill Gates did complete, after all, at least some of his Harvard classes (and that I did not pay for any of them).

When students strike because they don’t like tuition increases, they would do well to keep it in perspective. The future that they can’t see is one with higher taxes to be paid (and which they will have to pay) in order to fund the University system that they are in today. Paying more today might seem like a harsh expense.  The expense is really the same, however. It is only a matter of transferring the payment of tuition from someone who only indirectly benefits through a supposed externality, to someone who obliviously benefits directly. Economists teach students that markets are efficient when those that directly benefit from a good incur the cost of that good. Transferring the cost of education from taxpayers to students does nothing to change the total cost, and reduces the negative externalities that higher future taxes can create.

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3 Responses to “The Unseen Cost of University Tuition”

  1. And to think, there are actually "Masters" degrees in economics.

    Economics is fundamentally about how much and what kind of labour and natural resources you're going to put out
    and how much and what kind of labour and natural resources you're going to get in return.
    The simplest example, stemming from those whose right to live amongst men and women of concience is in question, is to invest in the labour of violence, bribery, intimidation and deception and the natural resources that makes that labour most effective in return for the "sweet" labour and resources of home building, furniture design and building, food production etc..
    Something akin to what the DesMarais family did: http://www.idesignarch.com/billionaire-paul-desma
    If in doubt "Master" economics lends to revealing this more clearly:
    "Another way is to look at what that invested money would have done over the worker’s life. Businesses rely on our hard-earned savings to fund their investments today. A reduction in savings translates into less funding for business investment. Less business investment implies less job opportunities, or fewer goods created to satisfy our wants and desires. "
    Take a real economics view and we can see that certain people expect and will demand in some way, using brute force if necessary, your hard earned money in order to pay others to produce for them things like this: http://www.idesignarch.com/billionaire-paul-desma
    or you will receive fewer goods to satisfy your wants and desires. It's real economics manifested with money, investments, and markets.

    Once this is understood to be the fundamentals of all economics one need then simply look to apply some form of ethics or non ethics to the formula whereby instead of "Master" economics such as:
    "When students strike because they don’t like tuition increases, they would do well to keep it in perspective. The future that they can’t see is one with higher taxes to be paid (and which they will have to pay) in order to fund the University system that they are in today."
    one ends up with something akin to:
    "When students strike because they don’t like tuition increases they might get beaten by police officers
    in order to remind them that all negotiations for more than one's fair share of the sweet labour of home building, quality food, good clothing etc.. made available through previous brutalities and ongoing oppression need pass by at least them and since it's Quebec "la reine DesMarais" as she may be adding an extension to the thing she had built in Sagard.

    As the reality of these economics sets in, be it in a classroom or a hospital bed, the "external alternative" having made itself known and preferably remembered, one can begin then to apply the real economics of alternative fulfillment which might include something as simple as using one's tech gear to acquire and assemble, assemble and acquire the information that is called education in an ethical framework that is more to one's liking whereby the "external alternative" will most likely tend to increase though without any real jurisdiction or upholding law
    since there are a few salaries that wold be at stake: http://www.statcan.gc.ca/pub/81-595-m/2010082/tbl

    In this light we end up seeing that the application of time and energy, that is the effort, in cost assessment is not so much a matter of dollars and cents, taxes and pension, investments and their visible and invisible returns (see above links to the "invisible" estate), yet the elements of trade, their supply, their demand and the ethics or non ethics one applies to the exchange.

    That's real economics and, pardon my lack of monk like patience, about time it was fully formalized and taught.

  2. Lawrence says:

    This article is really lacking in scope. My article explains the causes and consequences of the education bubble. http://www.libertarianmonarchy.com/education.htm

  3. mariana says:

    I was waiting impatiently for an article to be written about this. As a University student I have been through some unfair treatment for not being part of the "movement" and not boycotting class. My department voted on a motion that allowed all students who had been striking to be exempted from assignments from March 5th until the end of the semester. Yes, all the hours spent on my final assignments were "worthless".
    I try to instruct my classmates on the subject, but I gave up. It's what is taught to them from the cradle.

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