Currently, universities around the United States have to fill budgetary gaps due to cuts in higher education spending by federal and state legislatures. Universities have had to change the focus of their funding efforts in the past. However, the rise in popularity of online education has changed this focus again. It has become common for a public university to have two financial economic models. First, it’s the traditional brick-and-mortar model of a “public good” approach primarily financed through public funds or by the state government. Second, and the focus of this article, is that universities — even public ones — are acting as profit-maximizing economic agents.
As an economist, I believe this model may be a better approach to education. Before I explain why, I need to give you a brief economic lesson. The most agreed upon principle of economics is the notion of “incentives matter.” People tend to respond to incentives in a rational way. In other words, a person or entity will respond in a way that is in their best interest. Therefore, a profit-maximizing university will, by necessity, meet its students’ needs and wants. If students want a degree that is freely given away, a university will respond and make it easier to get a degree. Moreover, a university will also respond to a business that demands better graduates.
Given these two sometimes-competing demands, a profit-maximizing university will aim to serve both demands. The reason for this is simple: if the university loses students or students cannot get employment in their field of study, few people will attend the university, and it will lose money. Both students and businesses benefit from a better quality education; therefore, if the incentives are allowed to operate freely, both parties will be better off with a high-quality, profit-maximizing online education.
The major concern with the new profit-maximizing university is the fear of degree mills that rubber-stamp degrees for quick profit. This concern is justified; however, the market will respond quickly to correct the problem. The students with the low-quality education will signal to the market that the offending university’s degree is inferior, and the university will then lose students and profit.
With this objection and the incentives of quality, many universities have found the lure of online revenues at relatively low cost as a needed source of education funding. The profit-maximizing model employed by many traditional brick-and-mortar universities’ online presence provides a superior incentive structure to the alternatives.
Another benefit of the profit-maximizing online education is it offers universities the ability to attract students who would otherwise have been impossible to reach. Students in other states and countries can now, via their computer, attend a place-based university. Universities in the past would have charged these students out-of-state or international tuition due to state government reluctance to subsidize out-of-state students. Now, however, the profit-maximizing online university can serve these students at the same cost as local students, for the marginal cost of an additional student at an online program is near zero.
The funding models of universities will create a large discussion of the legitimacy of online education and a profit-maximizing model. The discussion is needed; however, universities, professors and students should not be afraid of the new system. If economics is correct, the market will ensure that the best educational outcomes emerge.
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