Many news articles are starting to note that middle and upper-middle class parents are having trouble paying for their children’s college educations. Most of these articles see this as a new development. But the story is actually more than 50 years old.
Throughout the 1950s, and with the best of motives, Americans gradually adopted a policy of allowing—even encouraging—colleges to use what economists call first degree price discrimination. Here’s how this price discrimination works:
1. Every good or service offered for sale has a different value for each of the various people who will choose to buy it. That is, some people will be willing and able to pay much more for any good or service than other people will be able or willing to pay for the same good or service.
2. Normal market pricing consists of the producer of a good or service choosing the price that allows the producer to make a reasonable profit after production costs. When the prices posted by all producers are added together, they comprise the supply curve. When the prices that all the potential consumers are willing to pay are added together, they comprise the demand curve. Competition among producers forces market prices into a narrow range. Those who are only willing to pay a lower price than that range buy none of that good or service. Those consumers who are willing and able to pay a price higher than the range—sometimes a much higher price—get a break and buy the good or service at a lower price than they are willing to pay.
3. First degree price discrimination occurs when normal markets are interfered with and producers are allowed to learn exactly what each consumer is willing and able to pay for the good or service. Using this data, all the producers set individual prices for each consumer, eliminating competition and forcing the consumers that are willing and able to pay a higher price to pay it. In this pricing scheme, those who are willing and able to pay only a lower price get a break.
Read more: http://www.american.com/archive/2012/august/the-high-cost-of-college-an-economic-explanation
Throughout the 1950s, and with the best of motives, Americans gradually adopted a policy of allowing—even encouraging—colleges to use what economists call first degree price discrimination. Here’s how this price discrimination works:
1. Every good or service offered for sale has a different value for each of the various people who will choose to buy it. That is, some people will be willing and able to pay much more for any good or service than other people will be able or willing to pay for the same good or service.
2. Normal market pricing consists of the producer of a good or service choosing the price that allows the producer to make a reasonable profit after production costs. When the prices posted by all producers are added together, they comprise the supply curve. When the prices that all the potential consumers are willing to pay are added together, they comprise the demand curve. Competition among producers forces market prices into a narrow range. Those who are only willing to pay a lower price than that range buy none of that good or service. Those consumers who are willing and able to pay a price higher than the range—sometimes a much higher price—get a break and buy the good or service at a lower price than they are willing to pay.
3. First degree price discrimination occurs when normal markets are interfered with and producers are allowed to learn exactly what each consumer is willing and able to pay for the good or service. Using this data, all the producers set individual prices for each consumer, eliminating competition and forcing the consumers that are willing and able to pay a higher price to pay it. In this pricing scheme, those who are willing and able to pay only a lower price get a break.
Read more: http://www.american.com/archive/2012/august/the-high-cost-of-college-an-economic-explanation
No comments:
Post a Comment