Advise on the changes in citizens' welfare caused by the increase in university fees, considering the resultant partial switch from public to private funding of university education.

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Microeconomic Essay


Advise on the changes in citizens’ welfare caused by the increase in university fees, considering the resultant partial switch from public to private funding of university education.

Citizen Welfare can be measured using several economic forms of analysis. The current controversy over the introduction of top up fees have led people to evaluate the effective increase in consumer prices. Any change in policy can have both good and bad effects on different groups of society. For many problems in society, we wish to observe the effects of a policy change and its repercussions on the welfare of society. In this paper I will attempt to discuss the result of an increase in university fees by examining the Marshallian and the Hicksian measures of consumer surplus. I will consider the differences in analysis and the outcome of applying them to the situation.

In the situation of an increase in fees, we are essentially looking at an increase in price.

The diagram below shows a monetary loss due to the increase in price from p1 to p2. Students are now paying more for their tuition they are consuming. After the price increase the student moves from x1 to x2 at a new higher price of p2. Each unit of education is now more expensive by an amount of (p2 – p1). The result of this means that the student now has to pay (p2 – p1)x2 more money than before.

Due to the increase in price, the student is cannot afford as much education, therefore the triangle T represents the consumption loss and R represents the loss due to having to pay higher tuition fees. Looking at this model it is clear to see that an increase in price leads to a loss of welfare as the consumer is forced to have less than originally wanted.

Consumer surplus is a nice way of demonstrating the change in welfare, but for some measures, such an approximation may not be suitable. Alternatively we can look at ways to measure utility changes. We can estimate utility by observing consumer choices and also by measuring it in monetary units. Here we are looking at how much we would have to compensate a consumer for a change in his/her consumption patterns. Here we are going to look at the compensating and equivalent variations. In the case of an increase in tuition fees, the consumer (student) initially faces the tuition fees at price () and consumes the bundle (). The price of tuition fees increases from  to , and the consumption changes to (). From this we can try and evaluate what effect this price change has on welfare of the student. The amount of compensation required to keep the student as well off as before the price change is one way of finding the answer. In the diagram we ask how far we would have to push the budget line in order to become tangential to the initial indifference curve at the original point (). The change in income that is required to compensate the student for the price change is called the compensating variation and is shown by CV on the diagram. This amount is what the government would have to pay in order to keep the students at exactly the same level. In reality, the government is doing the exact opposite. They are privatising tuition fees, meaning that students will no longer be compensated and will be forced to pay much higher prices. In other words, it is the amount of wealth taken away in order to keep the individual at the same utility level with new prices and old utility. Therefore, the value CV shows the welfare loss of the students.

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The other measure to look at is the equivalent variation. This looks at the amount of money that would have to be taken away from the consumer before the price change to leave him/her as well off as after the price change. It is the income change that is equivalent to the price change in terms of the change in utility. Here, EV measures the maximum amount that the student will be willing to pay in order to avoid changing their utility level, ie remain indifferent in terms of their received education. In other words, it is the amount ...

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