Wednesday, September 30, 2009

Time is money, except at universities

The Raliegh News & Observer reports that North Carolina Central University recently discovered that it had under-calculated its student activity fee--by one cent. With 8,501 students, the university stood to lose a whopping $85.01.

NCCU's solution? Bill each student one cent and tell them to pay up.

After a rumor circulated that students would be fined if they didn't make good on their bills, students started queuing at the bursar's office with their pennies.

A one-cent bill is ridiculous and is the ultimate example of a policy that ignores costs and only considers benefits.

For the sake of argument, assume that it takes exactly a day for one clerk, making $20,000 per year, to process all 8,501 payments. A day of the clerk's time comes out to $80 (more if you consider any benefits that the university has to pay to the clerk). So, under an absolute best case scenario, the one cent increase ends up being a wash.

If you add it the value of bad publicity, ill will, and time administrators now have to spend addressing complaints, NCCU loses on the deal.

This calculation, however, ignores the externality that the university imposes on the students in terms of lost time. Assume that students all pay their bills in person and that it takes each student an average of 10 minutes to walk to and from the bursar's office and to stand in line to pay the bill. If we value each student's time at the minimum hourly wage of $7.25, the cost per student is roughly $1.20 to pay the bill, and the cost to the student body is just over $10,000. If it takes the students longer to pay the bills or if their time is worth more, the costs go up.

Of course, students could have cut these costs by mailing their pennies. First class postage costs 44 cents; an envelop costs 5 cents, and it takes a few minutes (say 2) to fill out the bill and address the envelop. Again valuing the students' time at the minimum wage, the per student cost comes out to 73 cents, and the total cost tops $6,200.

So under some very generous assumptions, the university would incur at least $80 in costs and impose an added $6,200 to $10,000 in costs on its students, all to bring in $85.01.

Recognizing its mistake, the university has changed its policy and will apply the one cent increase to next semester's bills. However, don't look for the university to dock any administrator's salary for the inconvenience he or she caused.