Public Universities (Continued)

Sticking to the previous post on public universities...  

One possible source of market failure is market power.    If we recall how a monopolist sets prices, the monopolist is looking for the place where marginal revenue is equal to marginal cost.  This means prices are above marginal cost, and not all gains from trade are realized.

So would for-profit universities have market power?  

Well, maybe.  There are certainly substantial economies of scale in the provision of education.  The marginal cost of educating a student is probably very close to zero.  Once a university has set up labs and classrooms, hired faculty and staff, built a football stadium, and made other essential investments, the cost of adding one more student is small.  So maybe the economics of education aren't that different from the economics of a regulated utility, such as Rocky Mountain Power?

But one important difference between a university and a utility is customer switching costs.  It would be hard for a Salt-Lake-based homeowner to buy power from another utility if the local utility raised prices. But students could easily travel out of state for education bargains if Utah's universities raised prices.  

Another notable feature of education is this line from the Trib article:

"It costs about $6,000 per year to educate one full-time college student in Utah, with tuition covering about 40 percent, according to William Sederburg, Utah's commissioner of higher education."

This is unlike the market for electricity, where the state mandates that Rocky Mountain power can charge prices that cover cost but just barely.  So why the subsidy?