Is demand pricing for public services fair?

A recent article in the LA Times describes a pricing experiment at California community colleges, where classes in high demand are priced higher. For example, Long Beach City College has started offering a perpetually sold out, month-long certification course in phlebotomy at nearly five times the standard per-credit rate.

Some students who could demonstrate economic hardship received discounts from the new, higher price, but still paid significantly more than the standard rate.

In this blog I’ve examined fairness and our social nature as the basis for public services and public service marketing. I’ve also delved into demand pricing of public services like electricity. Now, with California conducting this pricing experiment for education, I started wondering, is demand pricing for public services fair?

The answer, as often occurs in life, is it depends. In the case of public services, it depends on the reason for demand pricing.

With electricity, demand pricing is a signal to consumers and the marketplace to seek out and use substitutes. It provides motivation for consumers to shift their consumption to different times of the day, to simply stop wasteful use, and to purchase more energy-efficient products. Lowering energy consumption can also reduce environmental pollution, which in turn lowers social costs and increases quality of life.

In other words, if you want to consciously reduce consumption, change behavior, and drive consumers to viable substitute products and services, then demand pricing can make sense.

But in the case of community college education, I don’t think that we should strive to reduce consumption or discourage consumers’ behavior.

Delaying education does not serve students wanting to raise their economic status, employers looking for skilled workers, or communities striving to increase wages and thus tax bases. Research is showing that even a few community college credits can help raise a worker’s wages 10 percent or more.

Students who are already better off economically can afford the higher priced classes, which in turn furthers their economic advantage. In addition, the same entity that holds a monopoly on community college education, state government, is also the entity that controls market entry of viable substitutes, through the school accreditation process.

It seems neither fair nor wise to use demand pricing for community college education.

So, what other guidance does pricing give in this instance? When demand exceeds supply, suppliers can also increase their production, knowing that a ready market awaits.

Economists can graph the combination of supply and price that will produce the optimum output for a given product and market, even in the case of monopoly. There’s an equilibrium of additional phlebotomy courses at a somewhat higher price that will maximize the market for both the students and the state.

Raising the prices somewhat for everyone, and using the increased funds to offer additional courses, would make more sense in this case. Phlebotomy courses at Long Beach City College have been under-supplied for nearly five years. Small rate increases over five years could pay for additional courses, and students could move on to higher paying jobs that would help alleviate the recession.