This article in the WSJ reports that the primary beneficiaries of subsidies to college tuition are the colleges. It might be a good example to illustrate the incidence of a subsidy for a good with an very inelastic demand.
by: Editorial Staff
Jul 20, 2015
Click here to view the full article on WSJ.com
Jul 20, 2015
Click here to view the full article on WSJ.com
TOPICS: Education
SUMMARY: A new Fed study shows that colleges pocket most student subsidies. The New York Fed staff paper is available at http://www.newyorkfed.org/research/staff_reports/sr733.pdf.
CLASSROOM APPLICATION: Students can evaluate the effect of grants for higher education on the tuition by using supply and demand, students can evaluate the effect of subsidy on the demand for higher education and ultimately the equilibrium price. Investigating the issue in greater detail, students can examine the relationship between the price elasticities of supply and demand and the effect of federal student aid on equilibrium tuition rates.
QUESTIONS:
1. (Advanced) In a perfectly competitive market, what is the effect of a subsidy for purchasing a good on the price of the good? How does the magnitude of the price change depend on the price elasticities of supply and demand?
2. (Advanced) What is the effect of federal subsidies to higher education on tuition?
3. (Introductory) Should the federal government subsidize higher education? Should it cap tuition increases set by colleges and universities?
1. (Advanced) In a perfectly competitive market, what is the effect of a subsidy for purchasing a good on the price of the good? How does the magnitude of the price change depend on the price elasticities of supply and demand?
2. (Advanced) What is the effect of federal subsidies to higher education on tuition?
3. (Introductory) Should the federal government subsidize higher education? Should it cap tuition increases set by colleges and universities?
Reviewed By: James Dearden, Lehigh University
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