A revisit on Economic Nature of Higher Education – Praveen Pilassery


Universities require constant infusion of resources to maintain and upgrade their facilities, resources and technologies. State funding for the same has been dwindling over the years and is irregular. Universities are expected to raise their own resources  – Report of the Committee to Advice on Renovation and Rejuvenation of Higher Education[i] 

The state investment in higher education is becoming lesser in India over the years (Govt of India 2009, FICCI 2011, 2014). Citing this as a reason, the government asks the universities to raise its own resources for financing various kinds of its expenditure. These different reports sounds like a dilemma that Barr observes, “the greater the public sector subsidy to the higher education the greater the pressure on the sector not to grow…. So that funding on higher education should not rely excessively on any one source” (Barr 1993).  In addition to this, various studies shows that state financing on higher education is not increasing adequately (Tilak 1988). Simultaneously there is an increasing focus on the market’s capability to look after the demands of the sector. An alternative way of resource mobilization through public-private partnership is also getting importance. The above quoted Committee Report is excellent evidence in order to see the changing paradigms of general view on financing on higher education. This makes the underlying question of who needs to finance higher education get more and more complex.

The controversy over the role of government in providing education to its subjects is not new. Adam Smith and Classicists believed and propagated that an ideal state policy should not interfere in the individual’s freedom to follow his self-interest in the best possible way that he could (Prakash & chowdhury  1994). The entire structure of classical economic thought was based on laissez faire, which consigned the minimal role to government in social affaires and management of the economy, assumed that the individual is expected to know what is good for her/is living. In those times education was outside the provision of market mechanism, it was so because the sector did not offer any opportunities of either trade or profit. Education was provided exclusively by religious organisations, private trusts or individuals to people but not universally (universal provision of education is a twentieth century phenomena).  

Along with the growth of economic activities in the period of post-industrialisation, the inequalities in income and wealth increased which shackled the relevance and impact of laissez faire principles on state policies (Prakash & chowdhury  1994). Governments started to interfere in economic activities (this led to the growth of public finance which deals with government’s role in economic affairs). The maximization of wealth and output was replaced by the maximum number of people. Empowerment of poor and equality in all levels became the guiding principles of government. Functions of government shifted from protective to promotional roles (Prakash & chowdhury  1994). But controversies accompanied; it was about the relative advantages and disadvantages of provision of different goods and services between market mechanism and non-market mechanism (here the public provision).

For a long period of time, it was considered that the state is supposed to provide free and qualitative education at all levels. It ensured the educational attainment of those who cannot afford it otherwise. Minimum education, in general, promises improvements in standard of living and reduction in differences between haves and have-nots. Education is considered as an instrument for upward economic and social mobility (Khadria 1998).  “In all countries in the world, however, education is a heavily subsidised product” (Breton 1974). Similarly high subsidies were provided for education in India. According to the documents of 1994-95, Central government subsidies on education constituted 5.6 per cent of the total Central subsidies. In addition to this about one-fourth of state government’s subsidies are on education (Govt of India 1997).

But it never meant that private participation in the provision of education is not called for in India. There was always an active and parallel education system existed in private sector. The education sector of India had an annual expenditure of about Rs. 70,000 million (Tilak 1988) and it is growing rapidly. Private interests will be genuinely active and vital in this huge potential market. In addition to the direct private initiatives in education, they were actively supported by government funding and such private aided educational system was very wide and active here. In some parts of the country their presence is much more than that of government institutions.

In the area of higher education the state had a much active role. In the post-independent period higher education expanded here with a vast state patronage (Tilak 2008). But in 1980’s as part of the restructuring of the economy with neo-liberal policies the importance of higher education in the state’s investment priorities was reduced. The international institutions like WTO, GATS etc influenced this change in government policies. As far as government stood aside from providing increasing demands of this sector, the market showed great interest to fill the gap; which was tolerated by new policy initiatives.

As mentioned previously private mechanism for provision of education was not a new concept in India. But private education through subsidized government funding was entirely different from private education through pure market mechanism (Tilak 2008). The later depended completely on fee paid by students for their existence. This was a new trend (public higher education is not free in India generally. Other than those of backward communities, students are paying fee which is highly subsidized for their higher studies here).

As mentioned before there is an increasing debate on the role of government in the provision of education especially higher education. Elementary education is considered more or less a responsibility of government everywhere[ii]. The growth of private sector as an alternative to finance education was a catalyst in this dilemma. Economists and policy makers, increasingly, started to believe in the ability and efficiency of private sector in providing the needs of education sector (Levin 1987). Along with the controversy over the nature of financing higher education, theoretical explanations regarding the nature of higher education gradually changed. Such explanations are very vital to the issue because nature of the commodity or service is a determining factor in the perspectives on it. Conventionally we considered higher education as a public good. Now it is increasingly considered as not a public good but more as a private good. Here we are analysing such trends in economics of higher education.

Nature of goods:

The distinction of commodities into different goods, like private and public, is arising from the debate on efficient allocation of resources (Musgrave and Musgrave 1984). In Economics goods and services are generally classified into public and private goods. But in addition to this division, there are various concepts like merit and non-merit goods, quasi-public goods, mixed goods, ambitious goods etc. The division of goods into such categories is to determine the efficient way of allocating resources for their production and to determine the fixation of price.

A general economic explanation of the type of goods that requires public provision remained vague until Sidwich’s and Pigou’s works came out in the late nineteenth and early twentieth centuries (Mureiko 1989). They made important contributions on the ideas of Adam Smith. Adam Smith advocated for the public provision of three types of goods namely national defense, the administration of justice & public works and institutions. But Smith stops himself from explaining the theoretical discussions of why these three types of public goods should be publicly provided. Sidwick and Pigou introduced and analysed the concept of the ‘free rider’ as an integral part of the public good character[iii]  (Mureiko 1989). According to Sidwick and Pigou a good must be publicly provided when it can be consumed by persons from whom payment cannot be collected; if not free riders can consume goods at little or no cost to themselves and destroy the incentives for private provision (Smith & Sidwick 1989).

Conventionally we considered that higher education as a public cum merit good which merits it for subsidies. But along with the wide application of neo-liberal policies on each and every part of the economy for wider marketisation; economic concepts on the nature of higher education also starts to change. Now it is all the time more considered not as a public good but more as a private good. Along with this some other concepts of economic goods, as mentioned above, which not gained too much attention in relation to higher education, now receives considerable attention from policy levels. In this context it is highly necessary to revisit on the economic nature of higher education theoretically.

Before doing so we can try to develop a structure of the education market. Like any other commodity, there is a demand and supply side for education. The students are demanding education. On the other side it is supplied either by state run institutions or by private institutions. Recently, due to the influence of neo-liberalism on policy level, there are self financing institutions in public higher education sector in addition to the conventional or ordinary state aided institutions. Private sector consists of both aided and unaided institutions. Unaided private sector or pure private investment in higher education is because of either profit expectations or philanthropic reasons. In general, profit-aimed private investment is dominating by the private sector of higher education. This is because we cannot expect a continuous and large scale investment in the sector only due to philanthropic reasons. The above explained structure is drawn below.

Now we can attempt to explain the different kinds of goods that are discussed in the literature.

  1. Public goods:

In simple words public goods are goods that would not be provided in a market system because firms would not be able to adequately charge for them due to the existence of two particular characteristics namely non-rivalrousness and non-excludability.

Samuelson explains public good as a good such that each person’s consumption of it is equal to the total supply of the good. According to the definition if X is the total supply of the public good and Xi is the ‘i’th person’s consumption then Xi = X. But for a private good, total amount of supply will be equal to the sum of the individual consumptions.  Instead of public goods he used the term “collective consumption goods” which was defined as “one which all enjoy in common in the sense that each individual’s consumption of such a good leads to no subtraction from any other individual’s consumption of that good” (Samuelson 1954). There are two essential characteristics in this definition. Firstly, no member of a community in which the good is produced can be prevented from consuming or enjoying the good and secondly each member’s consumption of the good, once provided, does not subtract from the supply available to other member’s consumption. The first character is referring to non-excludability and the second one is referring to non-rivalrousness or jointness of supply (Starret 1989).

Breton observes that according to Samuelson, the objective benefits of a public good enjoyed by a particular individual are independent of the benefits enjoyed by others. For Breton it is the technological property of public goods (Breton 1965).

Bowen defined public good as goods not divisible into units that can be unique possession of individuals (Bowen 1974). Olson defines public goods as “a common, collective, or public good is here defined as any good such that, if any person Xi in a group X1,…,Xi,….Xn consumes it, it can not feasibly be withheld from the others in that group” (Olson 1977).

According to Oakland “public goods are not used up in the process of consumption by any one individual; they are capable of being ’consumed equally’ by all” (Oakland 1969). Public goods are able to enter simultaneously into the utility function of all individuals in the community. He further observes that for public goods alternative uses of the good are perfect substitutes in consumption for all individuals. It should be noted that public goods does not exhibit substitution among individual utilities. It is because the distribution or pattern of individual utilities is independent of the allocation of a public good. In contrast to this the allocation of private goods among alternative uses affects the distribution of individual utilities; so that private goods exhibit substitution among individual utilities (Oakland 1969).

Alternative uses of a public good are depending upon the nature of the good itself. For some public goods the alternative uses will correspond to its locational patterns. For example highways, bridges and light houses. For some other public goods the alternatives will be the same as those for private goods; educational services can be allocated to consumers in many different ways. There are so many other competing uses, too, existing for public goods. From all these competing uses, we can say that a public good has the characteristic that an individual’s utility depends only upon the total quantity produced and not upon its composition (Oakland 1969). 

The four criteria given in the following defining a public good (Hart & Cowhey 1977). They are,

  1. Joint supply:  We can say that a good is in joint supply if its provision to one individual does not reduce the amount of benefits provided to others by an equal amount. For example a large park can be consumed concurrently by many individuals without diminishing the enjoyment of others.
    1. Non-excludability: It means that it is not feasible to exclude any individual from consuming the good. Thus, even though an individual does not contribute to the costs of the supply he may still consume the good. Once people realize public goods are available or non-excludable, there will be no incentive in them to reveal their true preferences (Mureiko 1989). When it is impossible for the supplier to exclude potential consumers from the consumption of a public good, it implies that marketing costs are infinite and therefore the non-marketing strategies should be employed (Head, John G & Shoup 1969).
    1. Indivisibility of benefits: Benefits of consumption are indivisible when it is not possible to assign fractural shares of the total benefit to individual consumers based on their share of consumption (Head, John G & Shoup 1969). This is due to consumption externalities i.e. one’s consumption is affected by someone else consumption (Oakland 1969).

“Externality exists whenever an output of one economic agent appears as an input in the consumption or production vector of another economic agent without any compensation being paid by either party” (Holtermann 1972). Consumption externalities arise due to two reasons. One is whenever an individual consider in determining the value of a particular good both the overall distribution of consumption as well as their own consumption. For example an individual may feel benefitted from the provision of immunization in his neighborhood even if he does not directly consume himself any unit of it. The other reason is related to the nature of the good i.e. there can be indivisibility of benefit because it is hard to determine what their share of consumption actually in the case of a road or bridge (Hart & Cowhey 1977).             

  1. Impossibility of appropriation: Absence of property rights lead to the publicness of a good. A good is impossible (difficult) to appropriate if it is impossible (difficult) to establish the ownership of the good. There may be two reasons for the difficulty to establish the individual ownership of a good – either because it is owned by no one or because it is owned collectively like oceans.

In determining a public good we can add the following too in addition to the four criteria that we discussed above.

  1. Degree of commonality: In contrast to private goods, consumption of a public good by one individual does not diminish the quantity that can be consumed by other consumers. Therefore public good stand at the opposite pole of private good with respect to its degree of commonality (Musgrave 1969). The public goods can be enjoyed by the community as a whole, whereas the former can be enjoyed only by those in possession of them.
    1. Non-rivalry in consumption: Non-rivalrousness means the partaking of the consumption benefits by one person does not reduce the benefits derived by all others. It is an extension of joint supply. It is completely absent for public goods. For private goods consumption is characterized by perfect rivalry (Oakland 1969). Public goods permit joint consumption.  
    1. Sharing groups: In developing a theory of clubs Buchanan observes that the optimal sharing group for a public good includes an infinitely large number of consumers (Buchanan 1965). 

It should be noted that all these criteria are interdependent of each other. 

  • Private goods

The case of private goods is just opposite to that of public goods. We already examined public goods in detail; so the characteristics of private goods can be summarized as follows.

  • Exclusion is possible in the case of private goods (here exclusion refers to price exclusion). Consumption takes place when an individual pay for a commodity and those who does not pay for the commodity is excluded from the consumption of that commodity.
    • Private goods are characterized by rivalry in consumption. Here one individual’s consumption reduces the benefits enjoyed by all others.
    • Benefits of consumption of a private good are divisible among consumers. When a particular consumer consumes a commodity, the benefits out of that consumption are applicable only to him and it is deriving from those units of consumption only.
    • Private goods enjoy property rights. This ability of private goods leads to exclusion in consumption.
    • A private good is consumed by a finite number of individuals generally one consumption unit i.e. one individual or one family.
    • Private goods are not possible to supply jointly.

3. Merit goods

It is difficult to define merit goods in one or two sentences. In rough words we can define merit goods as those goods that would be under provided in a free market system. It is argued that market fails to respect social ethos and community feeling (Chattopadhyay 2009). In the other side individual choices may be limited in market due to various reasons like information asymmetry, incapability of individuals to take rational decisions etc. At such situations in order to implement effective individual choices the larger society (i.e. the government) interferes.

Merit goods can be public or private but they are more closely connected with public goods. Merit goods are under provided in the market due to lack of property rights, non-excludability and non-rivalrousness in consumption etc. Public goods enjoy more or less the same characteristics. We know that price exclusion is not impossible but the problem is to decide when exclusion is economic. Exclusion is very expensive in the case of merit and public goods. In the case of such commodities market provision will be inadequate which requires government intervention.

Market mechanism is considered only about the private costs and benefits and not about public costs and benefits. A private producer may not be interested to produce a commodity which is giving less private benefit and more public benefits. One of the characteristics of a merit good is its ability to produce a high proportion of public (external) benefits (it should be noted that benefits here refer not only to economic benefits). We know that public goods also create a lot of external benefits.

4. Quasi-public good

Quasi-public goods or mixed goods can be defined roughly as those goods which have primary beneficiaries but generate externalities in the society. So there are collective as well as primary benefits but primary beneficiaries gets more benefits (i.e. direct benefits) than others. Chattopadhyay defines quasi-public good as “essentially a private good with positive externalities which accrue to the society as a whole” (Chattopadhyay 2009).

5. Joint goods

The concept of joint goods which was developed by Oakland shares some of the features of both private and public goods. A joint good has the property that a given output can be allocated among alternative uses, at least one of which generates joint consumption and such that not all individuals are indifferent between all users (Oakland 1969).

6. Ambiguous goods

According to Head & Shoup some services are there which will not come under the category of public or private good. These services any more efficiently provided under either market or non-market mechanism depending on both the following;

  • On how disposable income is distributed.
  • On how infra-marginal costs are being shared with respect to the service inconsideration.

Such a service can be termed as an ambiguous type of good (Head and Shoup 1969).

7. Club goods

Buchanan developed the concept of club goods in his “An Economic Theory of Clubs” (Buchanan 1965). Club goods are “those goods and services, the consumption of which involves some ‘publicness’, where the optimal sharing group is more than one person or family, but smaller than an infinitely large number” (the range of ‘publicness’ is finite) or club goods are those goods available for consumption to the whole membership unit of which the particular referred individual is a member. The concept of club goods will be relevant only if exclusion is possible (Buchanan 1965).

8. External goods

The commodities which exert external effects on other economic agents can be called external outputs or external goods. They are produced jointly with the commercial or internal output of the firm in fixed or in variable proportions. Determining a commodity as an internal good or as an external good depends entirely on compensation is paid or received for its consumption or not (Holtermann 1972).

There is no detailed literature available on joint goods, ambiguous goods and club goods. But joint goods are more similar to mixed or quasi-public goods. Ambiguous goods too are related to quasi-public goods. Details of club goods are not available to scrutinize its relationship with other variables.

Economic nature of higher education

Higher education was considered as a public cum merit good which deserves substantial government financial support. It is because the social benefits of higher education exceed its private benefits. That means the benefits of higher education is not only equipping the individual but also the entire society: benefits of higher education are indivisible.

The externalities created by higher education sector are numerous. The most significant contribution is the creation of qualified and trained teachers for primary education which is accepted as a public good universally (Khadria 1998). Higher education leads to creation of knowledge (Morginson 2007). Creation of knowledge is not an end in itself; it is the base of all other social mobility and empowerment. Higher education produces goods like literacy and common culture. Higher education significantly influences Research & Development activities.

Higher education creates external benefits to a wide range of activities. When the benefits created by higher education are indivisible, it will be difficult to calculate the individual share of benefits. The externalities are difficult to calculate here because of two reasons. Firstly an individual recipient of higher education while accounting his own consumption cannot accurately calculate the different sources of his knowledge. We cannot hire knowledge from a single source. Secondly an institution for higher education for particular recipient is more than of a class room, a teacher, a library or a lab etc but it is an amalgamation of all these things. It is not only one person approaching these facilities. While these facilities are consumed by different individuals, they are getting enriched by the latter’s contributions.

The nature of benefits of higher education is non-excludable. The output of higher education is produced not for a single purchaser. Appropriation is difficult here. For example a lecture delivered by a Professor can be attended by more than one individual. Even if a particular individual does not participate in the discussion he can still consume the product. Non-excludability exists due to the absence of appropriation in the sector.

Non-excludability refers to absence of property rights. It is difficult to appropriate products of higher education. Even if knowledge in the form of texts, equations etc are patented, in a competitive world it will soon become open to all. Other than this, the knowledge is a composite product contributed by different individuals at different times; hence appropriation of property rights over knowledge has its own restrictions.

Non-exclusion exists in higher education because their consumption is characterised by non-rivalrousness. When you are benefitted by a lecture given by a Professor, it does not lead to an equal decline of such a benefit to anybody else; everybody is receiving the benefits of higher education without reducing the benefits derived by all others. This character of higher education is an extension of joint supply.

We can say that the benefits of higher education are jointly supplied because in this sector provision of benefits to one individual does not reduce the amount of benefits provided to others by an equal amount.

But in contrast to the case of public goods, higher education does not fulfill the criteria of degree of commonality and infinite number of consumers. First of all higher education cannot be enjoyed by the community as a whole. It can be provided to only those who have eligibility and willingness to enter the sector. Secondly there are a finite number of people who will use a higher education product (for example the number of people who will go through the book of Constitution of India in a university library). Apart from these two conditions we can argue that higher education is a public product.

Higher education can be considered as a merit good too. One reason is that the sector is able to produce a high proportion of public benefits. Higher education is widely considered as a public cum merit good.

Higher education can be considered as an experience good (Teixeira 2009). It means that true assessment of higher education’s quality by the students is possible only when they consume the good; only during the process of consumption they will experience the good.

Higher education also produces positional goods or individualized status benefits. These goods are obtained by students. Admission to elite universities ensures students with opportunities to secure superior income and social standing.

Higher education cannot be considered as a private good. First of all property rights are not possible to impose on higher education sector. Secondly a product of higher education sector cannot consume wholly by one consumer. The benefits out of consumption of higher education are not divisible. Higher education is characterized by non-rivalry in consumption. Exclusion is impossible in the consumption of higher education. Finally higher education cannot be supplied individually.

“…higher education is regarded aptly as a ‘quasi-public good’….” (Tilak 1993) Here the argument is higher education is providing more benefits to the recipient. That means the direct or primary beneficiaries are in a better position than indirect beneficiaries. “Individual benefits increase by increasing levels of education” (Tilak 1993). Lack of higher education can be a barrier in making career choices, job entry and promotions (Nauriyal and Bhalla 2004). Getting higher education is increasing the individual status. So that claims of higher education to be viewed as a quasi or semi public good is not weak.


Higher education is a social relation not only between the students and institutions but also between the creators of knowledge and beneficiaries of knowledge. A market, in what ever better form, cannot replace such a relationship. A market is concerned with prices and those commodities and services which are not completely fit into the structure of price system, whatever the reasons are, cannot be provided efficiently with its mechanism. Public provision of higher education may have its own disadvantages but instead of strengthening it we cannot afford to dismantle the sector for quasi-markets or private markets. As like as public goods are provided more efficiently through non-marketing mechanism, it can argue that higher education can be provided more better in a quasi-market structure if its is a quasi-public good. Even though higher education can be considered as a quasi-public good, as some economists argue, we cannot agree with that because it is the government policies that formulates the ultimate nature of any commodity.

Quasi market solutions for higher education are not a viable option considering the bureaucratic structure and imperfections in the capital market. Considering the sector in par with private good is again suicidal. Higher education is a public cum merit good. So that government intervention not only as a facilitator but also as a provider is essential for the sector. If not those who cannot afford it otherwise will suffer.

[i] Report of the Committee to Advice on Renovation and Rejuvenation of Higher Education, Government of India, 2009.

[ii] For instance the Report of Government Subsidies in India 1997 recommended elementary education to be provided free. The same Report recommends to stop all subsidies on the provision of tertiary education.

[iii] A free rider is one who consumes valuable goods at little or no expense to himself.


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