Sunday, December 11, 2011

College Tuition Inflation

College tuition prices are, to be sure, just one example of how subsidies and taxes seldom turn out to benefit the people we hope the will benefit. Virginia Postrel sites a study about subsidizing the purchase of capital equipment, but the same can be shown in almost every area of the economy that has access to government enforced market manipulation. The effect is most exaggerated when one side of the supply and demand curve for a particular good or service is less elastic than the other side. Alex Tabarrok over at Marginal Revolution explains: ""Who pays a tax is determined not by the laws of Congress but by the law of supply and demand,” as Tyler and I say in Modern Principles. In particular, whether demanders or suppliers pay a tax is determined by the elasticities of demand and supply. The more elastic side of the market can better escape a tax, leaving more of it to be paid by the inelastic side. The same thing is true for a subsidy but in reverse, the inelastic side of the market gets the benefit of the subsidy." Take the minimum wage for instance, we want the poorest people among us to still be able to live on their wages so we set and arbitrary bottom to the cost of labor. The result is not, as we might hope, that the producer of the goods and services in question absorbs a narrower profit margin and everyone else benefits. Instead in areas of inelastic demand, like for instance food products, the price of the product is increased to cover the cost of the labor involved in it's production. We all need food so we buy it anyway and must forgo other purchases to do so. To a person of considerable wealth the loss of disposable income that comes with increased food products will be felt primarily in the loss of luxury items which are not necessary. But to the poor the choice will be much harder, losses are seen in the nutritional value of the food chosen, the loss of basic other necessities like utilities, transportation, educational needs and so on. Because the demand for food is relatively inelastic the costs are not born by the producer but rather the consumer. Poor people end up paying their own minimum wage at the grocery store and the gas pump. The list of these unfortunate unintended consequences goes on and on. Farm subsidies don't decrease the cost of food, they in fact increase the cost of both food and of farm land which in turn limits the ability of small farmers to enter into the market. Larger corporate farms succeed not by producing more and better food at a lower cost, but by gaming the system to absorb the most subsidies, often by producing less food. An intended result of many farm subsidies is an increase in market price by limiting the supply that ends up on the market. But this result is seldom seen where it's needed which is poor farmers, instead the result is seen on your dinner table. When we implemented farm subsidies to encourage the production of corn ethanol for our cars we eventually discovered that producing corn ethanol was more expensive and damaging to the environment than just using regular gasoline. This is widely accepted in the scientific community today but we still have the subsidies and we still have the required corn ethanol in our gas. Meanwhile so much corn is being used to produce fuel that the cost of using corn for feeding people and livestock has increased dramatically. We rich Americans have seen dramatic increases in the cost of food, but the result is most dramatic not here where we use the ethanol but in third world countries where people survive on abundant and cheap corn which is no longer available. For many around the world the subsidization of corn ethanol is not an issue of environmental impact but one of basic survival. We lose on all fronts with this subsidy. This is not to say that the urge to use our considerable political might for good is somehow a bad urge, but we must realize that the market is a more powerful force than government and when we attempt to push it around it pushes back. Today the complaint is that college costs too much, and to wit it does, but the problem may very well be that we're doing too much of the wrong things to fix it. We end up causing the exact problem we endeavored to eliminate.

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