The Design of the University System ∗

This paper studies a general equilibrium model suitable to compare the organisation of the university sector under private provision with the structure which would be chosen by a welfare maximising government. To attend university, and earn higher incomes in the labour market, students pay a tuition fee, and each university chooses its tuition fee to maximise the amount of resources that can be devoted to research. Research bestows an externality on society; government intervention increases needs to balance labour market efficiency consideration — which would tend to equalise the number of students attending each university —, with efficiency considerations, which suggest that the most productive universities should teach more students and carry out more research.