Who Wants Free College? Using Higher Education for Applications of Externalities and Asymmetric Information

Alan Green, Stetson University,
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Student teams are asked to identify the focus of U.S. policy with respect to higher education and then choose a specific policy to improve the higher education system. Economic concepts include market analysis, positive externalities and asymmetric information.

Context for Use

This activity was designed for principles courses that include an asymmetric information component. It could also be used in intermediate micro. In either case, the education market provides an excellent example of both positive externalities and asymmetric information. The activity will take 50-75 minutes. It starts with a readiness-assessment quiz, which is followed by two policy application exercises. The quiz is on background material including market analysis of higher education with a focus on positive externalities and the signaling aspect of college degrees to address asymmetric information in labor markets.


This activity is a team-based policy debate on higher education. The learning goal is for students to apply economic models and analysis to support their arguments on education policy. Specifically, they should identify a focus for higher ed policy that addresses the externalities in the market and then identify a specific policy recommendation that accounts for the asymmetric information problems pertaining to the signal that college degrees send to potential employers The application exercise has policy questions with five specific options. The topics are chosen and options are designed so that there is not an intended correct answer. Rather, students should be able to make an argument for any of the choices. Their task as a team is to discuss the issue and come to some consensus for the team choice. They are instructed to vote if they cannot come to consensus. The team discussion takes the first 15-20 minutes of the activity.
The instructor then facilitates a class discussion, which begins by having teams simultaneously reveal their choices (using large cards with letters). The teams are then called on in turn to defend their choices to the rest of the class. Their presentations should be couched in the economic concepts that underly this debate. The presentations begin a class wide discussion on what the best policy should be. The instructor facilitates this discussion for 10-15 minutes, after which it culminates in class vote. Students vote individually for the class vote, but extra credit can be offered for any team whose choice wins a majority of the class vote (thus incentivizing effective argument and persuasion).

Expected Student Learning Outcomes

In this activity students will use economic models to support policy arguments pertaining to higher education. They will understand ways to improve efficiency when positive externalities are present and also propose policies that account for the signaling role of college degrees in the labor market.

Information Given to Students

Student teams are given folders with both the quiz and application exercises.

Quiz - Markets for Higher Education (Microsoft Word 2007 (.docx) 17kB May14 18)
Application Exercises - Higher Education (Microsoft Word 2007 (.docx) 13kB May14 18)

Teaching Notes and Tips

This activity includes both a readiness-assessment quiz and application exercises. It can be completed in one class period or spread over two. The quiz is ten multiple choice questions on background material that has been previously covered in both readings and class lectures or activities. This material includes a market analysis of higher education including long term trends and positive externalities as well as basic concepts of signaling to address information asymmetries that can lead to separating equilibria in labor markets. The material can be used in principles or intermediate micro classes. The quiz is posted online for individual completion before class and then given to each team to take again in class along with immediate feedback scratch cards.

In the application exercise students are given two policy questions in teams. Their task as a team is to try to form a consensus around one of the five options for each policy. The policy questions are designed so that there is no "right" answer; the goal is for students to see how economics can inform policy debates. In this case, students are asked to consider two economic concepts that can lead them in different directions. For instance, they may want to choose a goal of sending as many people as possible to college to realize efficiency gains due to positive externalities associated with education. However, vastly increasing access and enrollment may have the effect of weakening the signaling impact of college degrees in the labor market. With these questions, students should be challenged to pick answers that are consistent with one another and address the underlying nature of the market. As students discuss the instructor should circulate, listen to arguments and ask probing questions to get students to think in terms of the models. Teams sometimes settle on a choice fairly quickly, especially options like "free college" that may seem highly appealing to them. In that case the instructor should challenge their arguments by arguing for other options and asking the team if everyone is in agreement. For instance, they should consider the impact of making college free on the value of their degrees, especially if they have already paid substantial tuition.

Once all teams have made their choices they should all report them simultaneously. This can be easily done by giving each team large letters (A through E) and having them all hold up the letter of their choice at the same time. The instructor should select one member from each team to briefly defend that team's choice to the class (random selection is good here; it is better if students do not know who is presenting until it is time to present so everyone has to prepare and be engaged in the discussion). The presentations can be graded and should be clear and based on sound economic reasoning.

The instructor then leads a class discussion on the topic, filling in or correcting flawed reasoning when necessary and also noting if there is a convergence to one or two options. Does the class have a consensus on what the priority for higher education policy should be? If so, is it in line with current policy? Why or why not? The discussion culminates in a class-wide individual vote on each policy. Students do not have to choose the same policy from their group for the individual vote; rather they can use the individual vote to express policy preferences that may differ from their group. If desired, additional incentives can be offered to any team whose policy choice secures a majority of class votes; a few extra credit points can motivate teams to build consensus and argue strongly for their preferred policy.


Quiz grades provide evidence of preparedness and general understanding. Exams using application type questions assess the students' ability to meet the learning goal for this activity.

References and Resources