Transcript More on Fees and Charges

More on Fees and Charges
© Allen C. Goodman, 2014
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MC = MB  Efficient, Always?
• In Micro principles you
learn that the average
cost curve is always cut at
the minimum by the
marginal cost curve.
• Always?
• If so, MB = MC gives us
something potentially
useful.
MB
MC
AC
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With perfect competition …
• Demand curve is
infinitely elastic.
• Entry and exit lead
to 0 profits, and
we’re producing at
least cost.
MB
MC
AC
MB'
MB''
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MC = MB  Efficient, Always?
$
• But, for some types of
goods, like public utilities,
you have some VERY
LARGE fixed costs, and very
small marginal costs.
• If MC < AC, what happens
to AC?
P1
• OK. If we price at P1 = MC
= MB, what will happen?
MB
What happens
if we price to
cover average
costs?
AC
Loss!
MC
Loss
Total Revenues < TC!
Quantity
4
Two (or more) part pricing
• Takes advantage of the
fact that some people will $
value nonmarginal units
MORE than the last ones.
P2
If we charge P2 for
nonmarginal units, we
may be able to cover
more revenue.
• This is done where you
have a fixed monthly fee,
and then a per unit
charge, like for water.
• Fisher notes that Disney
parks have a single
admission fee but no
additional price/ride.
MB
… although if you
must wait, there
may be
congestion costs.
Added
Revenue
AC
Loss!
MC
P1
Total Costs
Total Revenues < TC!
Quantity
5
TimelyEd?
…
How Should We Fund Higher
No?
• Items
– Higher Ed is an investment that increases
incomes. If so, who should pay? Why?
– If so, is it easy to collect the user fees? Yes it
is.
• BUT
– There are other issues with paying for Higher
Ed.
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Define PURE COST = Incremental
Cost of Particular Activity, so …
Colleges Produce Education and Research
Suppose a college’s costs
are $240 million /yr.
If they produced only
education, costs would
be $180 million/yr.
If they produced only
research, costs would
be $120 million/yr.
Pure Cost of research
(PCR)= $240 – cost of ed only,
$180 or $60
Pure Cost of educ. (PCE) =
$240 – cost of res. only, $120
or $120
Sum of the pure costs
is PCR + PCE,
or 60 + 120 = 180!
What are the rest?
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Colleges Produce Education and Research
Pure Cost of research =
$240 – cost of ed only, $180
or $60
PCR = 60
PCE = 120
JOINT COSTS = 60
Pure Cost of educ. =
$240 – cost of res. only, $120
or $120
Several Issues
Sum of the pure costs
is PCR + PCE,
or 60 + 120 = 180!
Research is a pretty
pure public good w/
MC = 0! Why?
Costs should be and to a
great extent are paid
by the public sector,
and not by students.
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Colleges Produce Education and Research
Pure Cost of research =
$240 – cost of ed only, $180
or $60
Pure Cost of educ. =
$240 – cost of res. only, $120
or $120
Sum of the pure costs
is PCR + PCE,
or 60 + 120 = 180!
PCR = 60
PCE = 120
JOINT COSTS = 60
Allocation of joint costs
is always an issue.
They are real costs, and
they must probably be
split between the
funders (i.e. tuition
and public).
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are
Students’ Full Costs >Students
Tuition!
already bearing
substantial
Studentcosts!
Cost
Category
Social Costs
Instruction
$16,000
$8,000
50
Books, etc.
$ 1,500
$1,500
100
Foregone Inc.$ 15,000
$15,000
100
Total
$24,500
75.4
$ 32,500
%
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Mobility and Spillovers
• Raising user costs may cause students
either not to go to college, or to go to
college elsewhere.
• In addition, there are spillovers of a state’s
education to residents of other states.
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Universities may have large scale
economies
• That is, in many situations MC << AC.
• The marginal cost (in many cases) of one
more student in a class may approximate
0. Should we charge 0?
• Or should we do a two-part charge …
which is often done!
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What about the poor?
• If we lower tuition, it lowers it for those
who are both rich and poor.
• Alternatively, we might charge user fees,
but give scholarships to the poor.
• Many state universities … and private
universities do just this.
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Moving on to Ch. 9 – Grants
An example – Until 1994, in Michigan, most
education spending was internally
financed, generally through local property
taxes.
What happened if the property in your
community wasn’t worth much?
A> You didn’t collect much in taxes
What did Prop. A Do?
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Grants – Michigan, 1994
For this and other reasons, in 1994 Michigan
switched to more centralized funding of
education.
Taxes are sent to Lansing.
Not clear in 2014!
Grants come back.
Leads to lots of questions
Where does it come from (Washington, Lansing)?
How much money will we get?
By what criteria will it be given out?
In what form will we get it?
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Types of Grants
• Specific, or categorical
– For a specific purpose – you must use it for
this purpose, and for no other!
– May be lump-sum ($X), or matching
(Medicaid, for example requires that the
states match federal $).
• General
– Revenue sharing, which is redistributive
– Block grants
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Impacts of Grants – General v. Matching
All Other
• Consider education
spending v. all other
spending.
Slope = -1.0, why?
• Suppose that there is a
lump-sum grant
A2
• Typically it will lead to
more A and more E.
A1
E1 E2
Education
Impacts of Grants – General v. Matching
All Other
• Suppose, instead, you were
given a matching grant,
where every $ you raised
would be matched with a $
from the government.
• Slope is now -0.5. Why?
Slope = -0.5, why?
A2
• Leads to much more E
and relatively less A.
A1
E1 E2
E3
Education
Income v. Substitution Effect
• Lump sum grant does NOT change
relative prices.
• Matching grant does!
• More … next time!
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