"Why is college getting so expensive?" - An Economic Perspective

"Why is college getting so expensive?" is the common question that we hear people asking everyday. It is a valid question anyway, as the cost for college today is 130% more expensive than it was in the 1970s, making young Americans today ponder if their four years of college education is actually worth the pay. Many people come up with different reason for this issue - budget cuts, physical maintenance, privatization - but there is also some economic explanations that are worth noting, like Baumol's Cost Disease theory and even a simple theory like supply and demand.

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As students are also less sensitive to the price, it allows the colleges to care less about keeping prices under control, and the nonprofit nature of institutions reduces incentives for colleges and universities to be efficient. But what is not often discussed is, the education sector, like the healthcare industry, has not increased in its productivity significantly like other industries. This makes it unable to produce more with less, unlike the car manufacturing industry - where it is making more cars with fewer workers and in less time than it did in 1980, and in turn, lowering the cost of cars for customers. Meanwhile, the average student-teacher ratio in college, sixteen to one, has not changed since thirty years ago, but this in any way does not let colleges pay their professors 1980 salaries. Hence the only way to pay 2012 salaries is indeed, by raising prices.