Universities can't be guided by an "invisible hand": the conditions in the higher education market are not such that optimum results will obtain from this sort of "free market" idea. There are several reasons why. First, demand for university courses fluctuates, and a low intake for a course one year, and therefore decreased funding, could unfairly penalise other people studying in that department, who are not free to leave (and take their money elsewhere) but simply have to suffer the decrease in quality until the end of their degree course. Second, universities don't operate in a true free-market system: the high start up costs (buildings, libraries) mean that it is very difficult for new universities to enter the market, even if standards in existing ones fall.Thirdly, there will always be those students who are poorer and have to go to the worse universities (if they cannot afford or do not want the burden of a student loan). A poorer student will either get a second rate education and waste valuable time and money or will opt out of higher education all together and accrue none of the benefits, since graduates typically earn more than non-graduates1.  1 Lexington, "Higher education: Is it really the next bubble?" The Economist, 21 April 2011,