tfdl

First off here is a working definition of "pecuniary externality".

Andrew Samwick, an econ prof at Dartmouth, chimes in on his blog, Vox Baby, about 529 Tuition Plans. Not sure I get the whole thing (I skipped Econ in college), but I think the gist seems to be that over time the rise in college tuition will go up as the size of the average size of 529 plans go up.

He talks about this in terms of “pecuniary externality”. Some excerpts:

The pecuniary externality comes in when we think about how much the tuition will go up. What drives that? I'd argue that it will be the average size of a 529 plan, as would be the case in any market responding to an increase in consumers' willingness to pay for a good. Since the tax advantage is positively related to income, even if all of the money going into 529 plans were new saving, it would be the higher income families that would have the larger-than-average 529 balances and the lower income families that would have the smaller-than-average 529 balances. (If the higher income families are simply shifting money from other accounts to 529 plans, then this strengthens the argument.)

Putting this all together, we can infer that the list price increases in college costs could outstrip the capacity of low-income families to pay them from their 529 plans. Depending on how much colleges raise their list prices and how the details of financial aid programs work out, lower income families may be worse off by the presence of 529 plans, even if they are saving through them.

Here is the link.

And here is Professor Samwick's entry on pecuniary externality as it relates to health care.