Will Baude is the latest to jump into the public universities argument (roughly between Jack Balkin and the Volokh conspirators); Will writes:

I don’t particularly have a problem with government involvement in the private education market—either through direct subsidy (which is probably unnecessary) or through regulating the likely capital market failure. In other words, government-guaranteed student loans are great; a “graduate tax” could accomplish the same thing.

I used to generally agree with Will on this point; however, I’ve come to think that government subsidies—like guaranteed student loans, Pell grants, and student loan interest credits—make public and private universities insensitive to price as a rationing mechanism. This leads to much of the same problem we see in the health care market: most consumers don’t discriminate on the basis of price, because they have no personal stake in the price of service. In the case of higher education, the problem is more subtle, as at least there are direct costs to the consumer—they just aren’t felt until after college, due to in-school deferments of loan interest and principal payments. Regardless, this allows universities to increase tuition and fees at rates well in excess of inflation.

The disconnect between price and demand also allows universities to use price as a “prestige” factor; although virtually nobody actually pays $40,000 a year to go to Harvard, the price premium makes it appear as if you’re getting a better education than you would paying $15,000 to go to Americana State University. (You probably do get a better education at Harvard, but I suspect the premium is not worth $100,000.)

There are good reasons to criticize public subsidies of state universities—particularly in a poor state like Mississippi—but public subsidy of colleges and universities in general bears considerable scrutiny as well.

Update: Will Baude responds:

One thing to think about—

The reason, in general, that American[a] State U has a tuition of 15,000 to Harvard's 40,000 has a lot to do with the subsidies that American State provides to its U. To be sure, some private colleges are cheaper than others, but lots of kids I knew did indeed take price (and their financial aid packages) into account when choosing between them. And the diversity of price in private universities is pretty small—I don't know whether that's due to a universal-ness of costs (I doubt it) or more likely because demand is fairly price-inelastic. While it's true that subsidies (and to a lesser degree, loans) encourage that elasticity, it's not actually clear that's bad. On the one hand, some kids go to Harvard who really should have gone to Miss. But on the other hand, some kids go to Miss who otherwise wouldn't have gone at all.

Just a thought.

My experience as an undergrad (granted, 5+ years ago) was that there was more price differentiation among private universities; I know the tuition at Rose-Hulman was significantly lower than that of Georgetown, and the price differential was more than could be justified on the basis of cost of living differences between D.C. and Indiana (not to mention that Rose-Hulman is a superior academic institution to Georgetown). There may be less differentiation among elite-tier private institutions like Chicago, Stanford, and the Ivys, however (some of that used to be due to now-illegal agreements among the Ivys to limit financial aid awards to exceptional students).

Now it is true that price does matter to some people, even with government subsidies (both to universities and students). On the other hand, I find it difficult to justify subsidizing a flagship public university like Ole Miss on the backs of working class people; that being said, Ole Miss may be something of an aberration in this regard, although I suspect a number of other colleges, like the University of Alabama, Auburn, and LSU, are similar “blue blood” state universities (to say nothing of elite-level state universities like UC-Berkeley and Michigan, which are far more selective).