This week I’m serving as a faculty member at the Institute for Humane Studies’ Liberty & Current Issues Seminar, hosted by the Catholic University of America in Washington, D.C. As usual, both faculty and students are housed in the dorms and treated to college cafeteria food. These conditions are made tolerable by the great company and intellectual stimulation. (Seriously. I do at least one of these events every summer, and it’s always one of the highlights of my year.)
I bring up the cafeteria food not to complain, but because I realized today at lunch (while discussing the food with two student participants) that it could be a nice example of adverse selection.
Have you ever wondered why college meal plans are so expensive relative to the quality of fare? Most college meal plans are all-you-can-eat propositions. With extra servings free at the point of service, students tend to consume more food until the marginal benefit is zero (contributing to the well-known phenomenon of the freshman fifteen). The excess consumption explains part of the price; it’s crappy food, but you’re paying for quantity, not quality.
But there’s more to the story. Some students naturally eat more than others. Yet most college cafeterias set a uniform price for all students, and that price must cover at least the average cost per student in order for the cafeteria to break even. Then each student (and their parents) must decide whether to enroll in the meal plan at that price, and this is where the adverse selection sets in: Those who eat more than average are getting a good deal, so naturally they enroll. Those who eat less, however, are more inclined to drop the plan and get their food elsewhere. As a result, the meal plan disproportionately attracts the heavy eaters, so the average cost per enrolled student must rise… and the cafeteria has to hike its price accordingly. The higher price leads yet more of light-eaters to drop the plan, and so on.
There are ways of controlling the problem. One way is to offer different meal plans that limit the number of meals per week. These plans deal adequately with the difference between students who eat many meals and those who eat few, but not the difference between those who eat a lot per meal and those who eat a little. Another possible solution is to offer meal plans with different restrictions on the food quantities and types; this approach is akin to health insurance companies’ practice of offering a menu of differing insurance policies to their customers, so that consumers’ choices effectively sort them into differing groups. Yet another solution, adopted by some colleges, is simply to require enrollment in the meal plan by all students or, as is more typically the case, all freshmen. This approach holds down prices by preventing the defection of light eaters, but it also effects a cross-subsidy from the light eaters to the heavy eaters. In addition, this grants greater monopoly power to the cafeteria, which can push prices back up (unless the prices are regulated by the provider’s contract with the university) or quality down.