Market Failure? Academic Departments

The Angry Professor describes a new budgeting system at LSU:

Several years ago LSU moved to a business model budget. Under this model, each department has control over its own funds. We might choose, for example, to give everyone a big raise. Or, we might choose to hire new faculty. We might purchase equipment, or furniture.

As with all such schemes, the administration makes sure that they will get money from somewhere to sustain their bloated salaries. Each department pays a "tax" to the college, which is determined by enrollments and indirects as earned in "Year Zero" (the year before the new budget took effect). If the department fails to generate at least the enrollments and indirects earned in this year, the college will take the shortfall out of the departmental budget. We're not talking about that funny fake money that colleges usually shuffle around, but real dollars: my raises.

Some good things have come out this arrangement:

My department and several others have taken advantage of the new model by "firing" the custodial staff provided by Physical Facilities and hiring a private contractor to keep the bathrooms looking spiffy. I must say, the bathroom has never looked cleaner, and my office carpet has been vacuumed for the first time in several years.

But, of course, the Angry Professor is angry. 

In the social sciences, every department is trying to offer statistics courses in house, so we now have about 8 courses titled "Introduction to Statistics in [insert department name here]." 

But why doesn't the Coase Theorem and comparative advantage apply?  The problem here can't be the budgeting.  I suspect a lack of property rights.

Each department is now in direct competition with every other for undergraduate enrollments.

Sounds good to me but the Angry Professor has a rebuttal:

The marginal departments, the ones with the lowest possible academic standards, are pulling in vast numbers of warm bodies and the tuition dollars associated with them. The departments that formerly only provided degrees to the football players are now thriving.

But grade inflation and the incentive to take easy courses in easy departments is nothing new, the only difference is that now the easy departments have funding commensurate with enrollments.  The bottom line, therefore, is that the angry professor is angry at the students for not choosing classes more wisely. 

A better grading system that takes into account the fact that some departments and professors grade easier than others would help students to make better choices.   It's not obvious to me, however, that on the whole the students aren't making rational choices.

Thanks to Tom Slee for the pointer.  I hope to say more about his interesting new book, No one Makes You Shop at Wal-Mart, in the future.   Contrary to the title it's about how markets fail, not a defense of Wal-Mart!