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Dr. James Ramsey Headshot

Consumer Behavior: The Case of Higher Education

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Each of us as individuals enters into numerous financial transactions every day. Most of these transactions come easily -- we don't even think about the purchase of most goods -- no detailed cost/benefit analysis of the benefit derived from the expenditure is required. For example, when our automobile needs gasoline, we stop at the service station, pump our own gas and pay for it.

At the same time, we realize there are certain financial transactions that require much more study, analysis, and shopping around; i.e., automobiles, homes, and college degrees. Certainly we make a distinction in our thought process for those goods and services that take a significantly larger portion of our income.

Economists distinguish between consumption goods and investment goods. A lay definition of a consumption good is a good that is "used up" when it has been consumed -- the hamburger we buy and eat at McDonald's; the gas we put in our car. When it's gone, it's gone.

In contrast, an investment good is a good that we consume and derive "utility" from on multiple occasions over time; i.e., our home, our automobiles, even the latest laptop or iPhone -- we purchase the good today but it has a useful life of a few or even many years.

Clearly, some goods have characteristics of being both consumption goods and investment goods. Education, and specifically higher education, has characteristics of being a consumption good and an investment good. When I decide to attend the local university, I am purchasing an investment good -- I am spending a lot of money (unless I happen to be on either a merit-based or need-based scholarship). The education I receive over time will pay dividends and provide benefits to me for many years into the future. Economic analysis shows that those who have a college degree will, in general, earn a greater lifetime income than those with less education. In fact, in recent economic times with significantly historically high unemployment rates, economists have shown the unemployment rate for those with a high school degree to be double than those with a college degree. In addition, it is often argued that those with a college degree tend to reap non-quantifiable benefits throughout their lifetime as a result of their education -- healthier lifestyles, lower medical cost, greater utility from the consumption of the arts, etc.

At the same time, while we are purchasing higher education, there are consumption "benefits" that accrue to us -- the joy of an outstanding lecture, the thrill of watching our basketball team beat our archrival, a night of partying after a mid-term exam, the individual we meet who later becomes our spouse, providing us years and years of happiness (maybe I am getting a little carried away), etc. Still, while some consume higher education because of the instant gratification or utility received from attending college as a general premise, economists would argue that the consumption benefit of a college degree is outweighed by the long-term benefit we receive.

Economic literature on human capital also makes a strong case that the consumption of higher education by one individual increases the utility of others in society.

If as a result of my obtaining a college degree I earn more income throughout my lifetime, I will pay more in state, local and federal income taxes that can be used to provide health care, shelter, and parks to a broader population, hence increasing the utility of those consumers.

If as a result of my acquisition of a college degree I follow a healthy lifestyle, I am, in a sense, reducing health insurance costs, not just for me, but for society.

If as a result of my additional income that I earn (as a result of a college degree) I am more philanthropic; again, a broader set of individuals in society benefit.

If I gain a skill set from my higher education that ensures me a higher probability of being employed and thus have less need for public assistance, society in general is better off.

Well, you get the picture!

Higher education is a consumption good with benefits, not only to the consumer but society as a whole and, perhaps more importantly for the individual consumer, it's an investment with a great rate of return.