COLLEGES AND UNIVERSITIES MUST BE COST-CONSCIOUS

A college or university faces powerful incentives to hold down its costs whether it is engaged in a mission-good or revenue-good activity and whether it is public, private nonprofit, or for-profit. As our two-good framework makes clear, though, the differing missions mean that the reasons for concern about costs differ. A traditional not-for-profit school has the incentive to hold down costs because the more successful it is at that, the more money it can transfer to its unprofitable mission. And when the school is providing its mission-good services it also has the incentive to hold down the production cost so as to be able to maximize the amount of the services it can provide. Thus, whichever activity the school engages in, revenue goods or mission goods, it faces the incentive to be efficient, choosing how to spend its resources – acting “businesslike.” It is clear that for-profit firms also have an incentive to hold down costs, as an element of their pursuit of profit.

Businesslike behavior extends in a number of directions in addition to cost-cutting. It includes the search for profitable markets, such as distance education or the leasing of the university's stadium or golf course for commercial use (which may be subject to “unrelated business” taxation if done “regularly” by a private nonprofit school).