Two big forces underpin a university’s costs. The first is the need for physical proximity. Adding students is expensive—they require more buildings and instructors—and so a university’s marginal cost of production is high, The Economist reports.

That means that even in a competitive market, where price converges towards marginal cost, modern education is dear.

It is also hard to raise productivity. University lecturers can teach at most a few hundred students each semester—the maximum that can be squeezed into lecture halls and exam-marking rosters. Because it is so labour intensive higher education relies on large numbers of instructors paid relatively modest salaries.

MOOCs work completely differently. Alex Tabarrok, an economist at George Mason University and co-founder of an online-education site, Marginal Revolution University, reckons the most salient feature of the online course is its rock-bottom marginal cost: teaching additional students is virtually free. The fixed cost of creating an online course is relatively high, however.

Getting started means putting together a curriculum, producing written and recorded material to explain it, and creating an interactive site that facilitates discussion and feedback.

Having invested in the production of a course, a provider’s incentive is to sell it to as many students as possible.

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