A note on the trade-off between efficiency and equity in public financing of higher education

Abstract

We build a model that captures the main elements of the public higher education system to evaluate the performance of different financing mechanisms in terms of efficiency and equity. Our main finding is that the provision of direct places in public colleges and universities raises a trade-off between efficiency and equity whenever part of the education cost is financed through taxes. Alternative mechanisms, namely public provision with tuition fees covering totally or partially the educational cost, are also analyzed. We show that, compared to these alternatives, the policy of “free” higher education performs worse in terms of the trade-off between efficiency and equity. The less the taxpayer subsidizes students the lower the trade-off.