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Efficiency And Equity Implications Of Charging Nonresidents Full‐Cost Tuitions

Contemporary Economic Policy

Published online on


With fixed costs and a break‐even constraint describing a public university, tuition and subsidy structures are endogenously determined that maximize constrained welfare, defined as students' value (net consumers' surplus) minus the taxpayer appropriation. Requiring nonresidents to pay full‐cost tuitions introduces relative deviations in demand that lead to efficiency losses and income transfers. To measure these effects, demand and cost expressions are developed to replicate standard decentralized budgeting frameworks for the University of Iowa and Iowa State University. Efficiency losses associated with requiring nonresidents to pay fully allocated costs are modest (2%–6%) compared to orders of magnitude larger distributional transfers from nonresidents to residents and taxpayers. (JEL I22, I28)