Essay on Econ

611 Words Apr 9th, 2015 3 Pages
Using the data and your own economic knowledge, assess the case for financing universities mainly through charging fees to their students.

Charging of fees means that payments will be taken from students instead of receiving subsidies from the government. Education is a merit good as it produces positive externalities (i.e. a better educated workforce that can increase productivity of the society) and is under-consumed as a result. Alternatives to charging fees include government funding, gifting money to university and selling research to commercial companies. There is evidently existence of market failure in education. Extract B, line 1 suggests that universities need more income, and they were finance largely through government
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The government uses taxes to subsidize universities and students. In order to achieve this, the government needs higher tax revenue to create money for subsidies.

Graph for Government Subsidies:

However, if government uses taxes to subsidize university students, taxes such as incomes tax will have to increase and this will increase the overall social cost. Furthermore, this will decrease citizen’s disposal income, which will lower their purchasing power and winder economic growth as a whole. There are two other alternative methods, selling research to companies and encouraging donation. However, even in the most successful cases in America, businesses only provide about 1% or 2% of university income. Also, Britain is very different from America and lacks a culture of charitable gifting to universities. Therefore these two methods may not be very effective if applied in Britain. Government subsidies may sound like a beneficial policy, but it will carry some unintended consequences. When the government subsidizes some product, it causes the price to go down and consumption to go up. While this will help university students initially because of the reduction in price, it also has the effect of leading to shortages because universities have limited places. In addition to creating a larger burden on taxpayers, the government will also have to bear opportunity costs of not being able to spend the tax

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