The FT reports that university enrolments in the UK have dropped 6% over last year, following a similar fall in the previous year. It speculates that this may be, in part, because “the rise in fees from £3,375 to an average of more than £8,000 appears to be suppressing demand.” No doubt the reduced subsidy has had an effect but we need to be careful with language here. The FT’s reporting suggests that demand has been ‘suppressed’ by the fall in the Government’s fee subsidy. It might be more accurate to say that the subsidy no longer inflates demand to the same extent.
The difference is important because the main justification given for subsidies is that tertiary education generates some wider benefit to society. The important question then is how great the benefit is relative to the subsidy, and so how much we want to subsidise to boost demand. Talking about ‘suppression’ implicitly assumes the optimality of the previous subsidy and ignores the distortionary effect that the subsidy has had on the market for tertiary education. If the externalities from tertiary education are small then it is entirely possible that the fall in student enrolments represents a welfare gain for society.