Product Mix and Cost Disaggregation: A Reinterpretation of the Economics of Higher Education

This paper attempts to separate undergraduate, graduate, and research costs at the university. Since the proportion of resources allocated to each of these activities varies systematically across time and institutions, this disaggregation alters our cross-sectional and intertemporal picture of productivity, net benefits, and subsidies in higher education. Real undergraduate costs are shown to be much lower than previously assumed and the social rate of return higher; educational "productivity" has been rising through time, contrary to popular belief. Undergraduate education is now a profitable "production" activity at universities, used to subsidize their "consumption" of loss-making graduate education. Community college teaching is more costly and heavily subsidized than university teaching of lower-division students.