Categories:
Microeconomics
Politics and Economics
Reihan Salam has had a number of interesting posts recently. Here, he discusses Kevin Carey’s analysis of how subsidies to college education ultimately benefit not the consumers but the suppliers.
Suppose that you want people to have more high-quality education and health care. You regulate the supply to ensure quality, and you subsidize demand to ensure that people can buy it. What happens?
If you make the supply inelastic and you increase demand, then the quantity stays the same and the price goes up. When this predictable result occurs, the politicians then complain about greed or some other flaw in the market.
READER COMMENTS
david
Feb 5 2012 at 7:42pm
Well, if you want skilled factor substitution between industries – and you must have skilled labour moving into the desired industry – then you must change relative factor prices, yes?
Or alternatively engage in massive degrees of skilled immigration, but that is unpopular among left and right.
Arthur_500
Mar 1 2012 at 5:37pm
We see the same thing when we decide to subsidize heating oil. the price of heating oil now has a floor that has been raised and the price has no need to drop. Demand is effectivelhy increased while supply remains the same. The result is that prices do not fall.
With education we see multiple factors creating an artificial floor. Many fields require a college diploma so there is an artificial demand. Many organizations as well as governments are willing to subsidize students (as long as they are not white, male, and over 30) which allows prices to rise with no effect on the student. finally many educational institutions are government operated so excess costs may be passed on to taxpayers once again causing an even higher artificial floor on pricing.
While supply and demand seem over-simplified, it really does explain a lot. However, when a business increases its prices – even educational institutions – the business is greedy. The educators and staff of those institutions who increase their salaries are simply called ‘public servants.’
Supply and demand has no response for semantics.
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