1. IntroductionThe substantially greater than inflation increases in college tuition during the late 1980s and first half of the 1990s ignited considerable discussion of the costs of higher education by both academics and nonacademics. The general discussion covered such issues as how much tuition has risen, why college costs so much (Ehrenberg 2000), the extent to which tuition fully covers costs (Winston 1998; NACUBO 2002), and what colleges are doing to cut costs (Strosnider 1998). Indeed, concern over rapidly increasing tuition spurred Congress to establish a National Commission on the Cost of Higher Education in 1997; the Commission conducted a review of college costs and issued recommendations for holding costs down.To economists, discussion of cost-cutting generally boils down to a simple question: What is the efficient organization of production? In a market economy, competitive pressures force profit-maximizing firms constantly to strive to produce more efficiently. Thus, information about the efficient organization of production can be deduced by observing organizations that survive and prosper (Stigler 1958). However, in the context of higher education, the answer is not so simple, for at least three reasons: (i) colleges are not profit-maximizing entities, thus market-driven pressures to minimize costs are, essentially, absent; relatedly, (ii) tuition/prices paid by students/customers do not cover the full cost of their educational experience (Winston 1998); and (iii) colleges typically produce multiple products, not just undergraduate education.Supposing that the individuals who run institutes of higher education (IHEs) have an interest in minimizing costs, how should they structure production to achieve this? That is, what should they produce and how much of it should be produced? Should colleges specialize and produce only undergraduate education, or produce multiple outputs, as so many currently do? Should colleges be small or large, in terms of student enrollments and/or grant research?These are complex questions in their own right. For example, take the question about the optimal mix of outputs to produce. Forgetting about the implications for revenues, there are a host of related empirical issues to investigate: What are the unit costs of producing different levels of only undergraduate education, graduate education, athletics, research, extension, or public services? What then, in comparison, are the unit costs of producing different levels of alternative combinations of two or more of these outputs? Knowing the answers to specific questions like these provides an essential foundation for informed decision making about the efficient organization of production in higher education.Estimating the cost of producing academic outputs is complicated by the fact that many, if not most, IHEs produce multiple products. Typically, the products include undergraduate and/or graduate instruction and research.1 In addition to these basic outputs, the state land-grant institutions also produce extension services. Many institutions also produce public services such as medical services, business assistance programs, museums of various sorts, theater productions, and the like. And, of course, IHEs produce both intramural and extramural athletics. Thus, for purposes of estimating unit costs, it is essential to treat IHEs as multiproduct firms.Further, it seems highly likely that the production of certain outputs affects the unit cost of producing others. For example, production of graduate instruction requires the administrators of an IHE to hire faculty with more extensive training and ability than is required to teach at the undergraduate level. Doctorally qualified faculty are more expensive to hire than non-doctorally qualified faculty, ceteris paribus. To the extent that the set of faculty providing graduate instruction and the set of faculty providing undergraduate instruction are mutually exclusive, the provision of the former has no cost spillover to the latter. …
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Nov 1, 2007
Giuliano Maielli 
Open Access