Public Services: How Much Should We Pay?

As we enter this gloomy recession scarred holiday season, are you searching for something about which to be thankful?

How about recent trends in your cost of living expenses? After all, gasoline prices have plunged below the four dollar per gallon level experienced last year. Housing costs have plummeted as well. And Starbucks is selling coffee for one dollar per cup … although it’s instant coffee and not freshly brewed!

If you are a senior citizen, though, you aren’t necessarily thankful. That’s because, for the first time in the history of the social security program, your annual cost of living increase will be 0%. President Obama has proposed paying each senior a one-time $250 consolation stipend, but that is cold comfort for elderly citizens with limited means. And there is limited support in Congress to pass even this meager benefit!

The Other End of Life

At the other end of life’s spectrum, college students at the University of California have also received some unpleasant news about an annual cost increase. In fact, during the past few days, they have staged raucous protests after learning about the increase in their tuition costs for 2010.

They’ll be paying 32% more for tuition in 2010 than in 2009 … ouch! And California isn’t even waiting for the new academic year to begin in September to institute this price hike; it plans to increase tuition halfway (i.e. by more than 15%) in January.

The California Board of Regents explained that the increase was necessitated by drastic reductions in government support and other sources of revenue. Nevertheless, as tuition rates at public universities soar towards levels charged by private institutions, we might ask why our universal right to free education no longer extends beyond high school.

Once Upon A Time, Public Meant Free

Years ago, of course, most public services were free. Public television, for instance, was free. Public museums were also free. And many public colleges and universities were free as well. In fact, Article XI of the New York State Constitution still requires that its “legislature shall provide for the maintenance and support of a system of free common schools, wherein all the children of this state may be educated.”

Over time, though, government programs began to edge away from the principle of free access. PBS, for example, began to ask for pledges from its audience. Public museums began to ask for voluntary donations.  And public universities began to charge user fees for certain services.

Today, we hardly expect any government programs to offer free access. Full fledged pledge drives have become regularly scheduled events on the PBS calendar. Public museums are charging as much as $20 per ticket for admission. And though the California university system still refers to its charges as “fees,” it freely acknowledges that they represent mandatory tuition payments.

Trusting the Free Market

If public services are no longer free, then our government officials must establish methodologies for setting prices. But how should they do so? What methods are appropriate? After all, after instituting prices for access, officials may learn that citizens with limited means are unable to afford the services. And yet, if there are no prices, officials may be unable to continue offering the services at all.

Economists, of course, recommend that governments rely on free markets to establish prices. However, free markets require numerous vendors to compete with each other to attract buyers; they cannot reach equilibrium levels of supply and demand and thus establish equilibrium prices when there is only one supplier in a market. Because there is only one PBS in the United States, only one Museum of the City of New York in the Big Apple, and only one University of California in the Golden State, government officials cannot rely on free markets to set prices for these services.

Trusting Government Officials

Officials may instead choose to establish prices at levels that partially or fully cover the costs of operations. But such a policy decision inevitably leads to another policy dilemma: should officials permit public service program managers to aggressively negotiate prices with their own vendors and suppliers? When there is only one organization that provides a service, and when that organization is a government entity, what would prevent the government representative from simply dictating terms?

The federal government, for instance, has forbidden the US Department of Health and Human Services from engaging in price negotiations with Medicare health care providers; they believe that Medicare is essentially a monopoly and thus cannot be trusted to negotiate fairly with vendors and suppliers. And yet, by negotiating price reductions with drug companies, for instance, the federal government could force down its program costs and then reduce enrollee service premiums accordingly.

So what is the result when we, as a society, fail to achieve any consensus regarding appropriate policies for establishing price levels for public services? The result is obvious: we end up with an oddball assortment of user fees, cost-of-living consolation stipends, and other randomly conceived payment mechanisms. But instead of taking to the streets in protest, California students and other dissatisfied citizens may be well advised to engage in private policy discussions instead of public shouting matches.