College Rating Systems and Higher Education Market Failures
This paper examines the Obama administration's proposed college rating system, which aims to evaluate institutions based on quality, affordability, and student outcomes. The analysis situates this policy within the broader context of market and government failures in higher education. The paper explores whether higher education functions as a public or private good, how government subsidies have contributed to rising tuition costs, and whether information asymmetry is the primary market failure. By assessing the college rating plan as a potential solution to these problems, the paper considers whether improved transparency can incentivize colleges to offer more affordable and higher-quality education.
- Introduction: The College Rating Plan: Obama administration proposes college ratings system
- Higher Education as Public and Private Good: Education exhibits both public and private characteristics
- Market Failures and Government Intervention: Subsidies and financial aid drive tuition inflation
- Information Asymmetry and Consumer Decision-Making: Students lack information to make optimal choices
- Policy Solution: The College Rating Plan: Ratings aim to correct information failures
- Conclusion: Market Failure vs. Government Failure: Plan's success depends on identifying root cause
✍️ How to write this paper — guide, tools & examples ▾
What makes this paper effective
- Situates a specific policy proposal within economic theory, grounding the discussion in concepts of public goods, market failure, and information asymmetry.
- Uses multiple academic sources to support competing explanations for rising tuition (government intervention versus information failure), avoiding oversimplification.
- Builds a logical progression from problem identification through policy analysis, allowing readers to follow the cost-benefit reasoning.
- Acknowledges the dual nature of education—both public and private good—to explain why multiple stakeholders view the problem differently.
Key academic technique demonstrated
The paper employs comparative policy analysis by weighing two competing causal explanations: government failure versus market failure. Rather than asserting one cause, the author uses this distinction to frame what the college rating plan can and cannot accomplish. This technique strengthens the conclusion by showing that the plan's effectiveness depends on identifying the root cause—a form of conditional reasoning common in economics and policy analysis.
Structure breakdown
The paper follows a problem-solution structure: (1) introduce the policy, (2) define the economic context (public/private goods), (3) diagnose failures (subsidies causing tuition inflation; information gaps), (4) explain the proposed fix, and (5) conclude with a key diagnostic question. Each section builds dependency on earlier reasoning, requiring readers to track whether higher education's market failure is primarily about underallocation, price signals, or knowledge gaps.
Introduction: The College Rating Plan
The Obama administration is attempting to create a rating system that will rate colleges based on their quality, affordability, and outcomes (Leonhardt, 2014). The goals of the program are to allow prospective students to compare colleges and to create an incentive for colleges to provide students with a good and affordable education (Leonhardt, 2014). The college-rating plan will measure the average net price of the college, completion rates, and graduates' earnings (Leonhardt, 2014).
In a time of increasing tuition prices, where college degrees remain necessary for economic prosperity, a rating system could create better information transparency and encourage stronger competition between colleges. By providing standardized metrics for quality, cost, and outcomes, such a system could help students make more informed decisions about their educational investments.
Higher Education as Public and Private Good
The current problems associated with higher education are consequences of both government failures and market failures. Higher education can be considered both a private and public good (Rampell, 2014). It functions as a public good because it is non-rivalrous in consumption (Marlow, 1997)—that is, one person's education does not diminish another's ability to benefit from education.
However, higher education also exhibits private good characteristics because it has the ability to exclude people, such as by charging tuition (Marlow, 1997). If higher education is more of a public good, then market failure occurs because it under-allocates the amount of higher education demanded (Marlow, 1997). Furthermore, since marginal costs are zero, achieving allocative efficiency would require all beneficiaries to be allowed access to higher education (Marlow, 1997).
The public generally views higher education as a public good, but today it is increasingly being treated as a private good (Rampell, 2014). Politicians are shifting the burden of expenses away from taxpayers and onto the shoulders of students. If education is treated more as a private good, then the market failure stems from information asymmetry and a failure to allocate resources on the basis of full social cost (Marlow, 1997).
Market Failures and Government Intervention
The government attempts to correct market failure by subsidizing higher education. However, these subsidies have been identified as contributing to rising tuition costs by fueling the tuition price boom (Lane, 2013). Financial aid allows families paying for college to be more price inelastic—less sensitive to price changes—which in turn allows colleges to raise tuition with less resistance (Lane, 2013).
Colleges and academic programs that do not have positive returns on education would fail in a free market, but subsidies have allowed them to continue operating (Lane, 2013). These failures have occurred because of government intervention, and now students are paying high tuition prices without clear knowledge of their return on their college education investment (Wall Street Journal, 2015).
Society receives many benefits from college-educated citizens, including a more innovative and productive labor force as well as more active citizenship (Bauml & McPherson, 2011). There are social benefits to having more college graduates; therefore, the government is able to rationalize college subsidies because the market fails to account for these social benefits (Rampell, 2014).
Information Asymmetry and Consumer Decision-Making
The government is attempting to correct information asymmetry by creating the college-rating plan (Marlow, 1997). For the free market to function optimally, college students must assess the college they are about to attend and decide what price they would truly be willing to pay for that education (Marlow, 1997).
However, if students are unaware of the quality, affordability, and outcomes of their education, they might have made a different decision had they possessed complete information (Marlow, 1997). The rating system seeks to address this knowledge gap by providing transparent, comparable data that enables students to evaluate the actual value proposition of each institution.
Conclusion: Market Failure vs. Government Failure
The effectiveness of the college rating system ultimately depends on correctly identifying the root cause of rising tuition and declining education quality. If government intervention through subsidies is the primary culprit, then merely improving information transparency may not solve the fundamental problem of moral hazard and reduced price sensitivity. Conversely, if information asymmetry is the core issue, then standardized ratings could empower students to demand better value and hold institutions accountable, thereby creating competitive pressure for affordability and quality improvement.
Always verify citation format against your institution’s current style guide requirements.