Government aid raises prices


Politicos don't like to talk about the law of unintended consequences, after all, the constant crisis keeps them in business

I know that this article discusses government backed student loans, but there are some important ideas here that apply to almost any government benefit. Emphasis added.

Aid supporters also note that the cost of attending college has been rising faster than the rate of inflation for the last two decades. Yet easy money at taxpayers' expense fuels this escalation. Basic economic theory tells us that boosting the demand for a product or service, which is what government loans and grants effectively do, tends to raise its price.

In a 2005 Cato Institute paper, Hillsdale College political scientist Gary Wolfram reviewed the relevant studies and concluded "there is a good deal of evidence suggesting that federal financial assistance has the unintended consequence of increasing tuition for all students." One study found public and private four-year colleges increased net tuition (taking internal aid into account) by 68 cents and 60 cents, respectively, for each additional dollar in Pell Grants. Another study found private colleges raised net tuition by 72 cents for each additional dollar of federal loan aid.

Different types of schools respond differently to increases in subsidies, and price hikes can take several forms, including cuts in state funding and internal aid as well as increases in the official tuition. But the general effect is pretty clear: When someone else is paying part of the tab, consumers do not worry as much about the cost, so the cost tends to be higher. This phenomenon creates a vicious circle in which subsidies push up prices, leading to demands for increased subsidies, which push up prices again.

Think about that as health care gets put back on the table with the new Congress.

— NeoWayland

Posted: Fri - January 26, 2007 at 02:52 PM  Tag


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