| Summary: | This paper presents a theoretical analysis of the relative use of general state subsidies (tax finance) and tuition (user charge finance) in the state financing of higher education. State universities across U.S. states are very different among themselves especially in terms of user charges, public finances, and qualities.
In this study, we consider only the State Regime in which the state government decides the user charge, head tax, and expenditure, taking the minimum ability of students as given and the state university simply is treated as a part of government. The households who have a child decide to enroll their children at the university, taking head tax, tuition, and quality of university as given.
The two first-order conditions of the state government’s optimization show the redistribution condition and provision condition. For a given marginal household, we show that under certain conditions, we have an interior solution of both head tax and expenditure. In the household equilibrium, the marginal household is determined at the point where their perceived quality of university is equal to the actual quality of university.
We solve the overall equilibrium, in which the given ability of a marginal household for the state government is the same as the ability of the marginal household from the households’ equilibrium. Since it is impossible to derive explicit derivation of comparative statics, we compute the effects of income, wage differential between college graduates and high school graduates, distribution of student ability on head tax, expenditure, tuition, tuition/subsidy ratio, and quality of university.
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