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(solution) ‘Top-up fees’ and the ‘Veblen effect’ From September 2006 universities in England will be able to...


‘Top-up fees’ and the ‘Veblen effect’ From September 2006 universities in England will be able to charge ‘top-up fees’ of between £0 and £3,000. They are called ‘variable top-up fees’ because the charge can vary between different courses in a given university and for the same course in different universities. Most higher education institutions are expected to publish information on projected top-up fees by Summer 2005, with that information contained in prospectuses for entry in 2006. It is expected that most universities will charge the full £3,000 annual tuition fee on at least some courses. However, ‘older’ (the so-called Russell group) universities can be expected to charge this full fee across a higher proportion of courses and subjects than ‘newer’ universities. A number of potential pricing (charging) principles are being actively discussed by universities. ■ Cost-plus pricing. Here top-up fees are higher where the costs of coursesubject delivery are higher. For example, science-based courses need expensive laboratories and equipment. ■ Revenue-based pricing. Here top-up fees are higher for those coursessubjects where demand is greatest. This often means coursessubjects which are the most popular with students, sometimes because they are expected to increase employment opportunities the most and therefore raise the expected lifetime income from studying that course. Let us first review some studies indicating lifetime returns on undergraduate study. Considerable evidence exists to suggest that projected student lifetime returns and other benefits (e.g. lifetime employment prospects) are greater, on average, for graduates than for non-graduates. The average lifetime return for graduates vis-à-vis non-graduates has been calculated at various times in the recent past. – In 1988 the UK government claimed that the annual rate of return on human capital investment in the form of a degree – reflecting the additional lifetime earnings a graduate will accrue over and above those of a non-graduate – was around 25%. – In 1996, the Dearing Report brought this ‘rate of return’ estimate down to between 11% and 15%. – In 2001 the OECD estimated that the annual ‘rate of return’ on a UK degree was some 17% vis-à-vis non-graduates (higher than that in any of the ten countries studied, such as the 15% of France and 10% of the Netherlands). – In the past few years the UK government has used a figure of £400,000 as the additional lifetime earnings for the average graduate vis-à-vis the average non graduate. – Data from the Department for Education and Skills 2003 focuses on comparing the lifetime earnings of those with a degree with a more specific comparator group than the ‘average non-graduate’. When comparing the lifetime earnings of graduates with those who ‘have the qualifications to get into higher education but choose not to go to university’, the earnings premium falls from £400,000 to £120,000 over the average working lifetime. The lifetime employability of graduates has also been emphasized in recent studies by the Council for Industry and Higher Education in 2003, which indicate that the overall demand for graduates is likely to exceed the growing number emerging with degrees, even should the 50% target be achieved. Let us now review some studies indicating variations in lifetime returns by subject course studied. Fragmentary data exists to show differential benefits to lifetime earnings of graduates by subjectcourse studied. – R. Naylor and A. McKnight of the LSE (2002) showed that occupational earnings for a female graduate in law or politics were, on average, 26% higher than the earnings of an otherwise identical social science graduate. – I. Walker of Warwick University (2002) showed that the rates of return to economics graduates were, on average, some 35% higher than for otherwise identical arts graduates. ■ Prestige pricing. Here price is itself associated with quality by users of the product. In situations where the information available to users is imperfect, price is often used as a proxy variable for quality. Student and parent assessment of educational courses characterised by differential top-up fees is an obvious candidate for such a ‘Veblen’ effect, reinforced by the fact that the ‘older’ universities (widely perceived by the general public to be of the highest quality) will be seen to charge the full £3,000 annual tuition fee for most of their courses. A major cross-country study into higher education by IDP Education Australia in association with the British Council in 2003 strongly supports the existence of this Veblen effect as regards international student demand for higher education. Senior researcher Anthony Bohm comments: ‘Students cannot make an informed choice about the exact quality of comparable products, so they use price as a proxy for understanding the value they will get out of an international programmed.’ Questions 1 Suppose you were responsible for setting the top-up fees to be charged for the course you are studying. Use the ideas in the case study to suggest how you might go about making your decision. 2 Can you explain how the case study might provide some support for an upward sloping demand curve for higher education?  

 


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