Reference no: EM132200716

Question: Why does college cost so much? Elasticity offers some clues.

From the end of World War II through the 1970s, the supply of higher education increased massively as state and local governments spent billions of dollars expanding their higher education systems. This massive increase in supply helped to offset the huge increase in demand that took place as the large Baby Boom generation flooded the higher education system starting in the early 1960s. With supply increasing nearly as fast as demand, the equilibrium price of higher education only increased modestly.

Things changed dramatically beginning in the early 1980s. With respect to supply, state and local governments slowed the growth of higher education spending, so that many college and university systems saw only modest subsequent increases in capacity. At the same time, the federal government dramatically increased both subsidized student lending and the volume of federal student grant money. Those policy innovations were of great benefit to poor and middle-class students, but they also meant that the demand curve for higher education continued to shift to the right.

That turned out to be problematic because, with the supply of seats largely fixed by the changing priorities of state and local governments, the supply of higher education was highly inelastic even in the long run. As a result, the increases in demand caused by student loans and grant money resulted in substantially higher equilibrium prices for higher education.

In response, some economists propose that the best way to increase affordability and access would be to put more priority on the pre-1980 policies that increased supply rather than demand.

Do you agree that a return to the pre-1980's policies as described above would be a cure for the lack of affordability and access to college today? Very Important! use the new tools of Elasticity of Demand and Supply to bolster your analysis.