The annual story about university Vice Chancellors’ pay rises is in the papers again today. I have to admit that some of the stats are a little eye watering. The average VC now earns £194,000.

There is, quite naturally, outcry about this from, well, nearly everywhere. At a time when Governments are threatening to cut university budgets, it does seem that this isn’t the best use of resources. There are lots of valid complaints in Universities about this allocation of cash, and about inequity in pay. These are perfectly right and proper.

However, there is one argument which is often carted out which I think is pretty wrong-headed. People seem to think that pay discrepancies in the public sector are more objectional than those in the private sector because they feel like they are paying for the former, but not the latter.

Just where, then, do they think the money for bankers’ bonuses, or Asda’s chief executive, is coming from?

Adam Smith tells us that, in a perfect market, price is set by competition, and by supply and demand. If one company is making excessive profits on a good or service, then another will cut it’s profit margins, and under-cut it’s competitor.

If banks can afford to pay massive bonuses – or Phillip Green can afford to pay himself enough in one year to double the wages of the entire Cambodian workforce for eight years – then this means there is a market failure. Either these companies are passing the costs of their bonuses onto us, as consumers, or onto those from whom they buy – their workers, and suppliers. In the case of banks, this means all of us. We all need financial services at some point in our lives, and we all depend on services which need financial services. The fact that there is a market failure (banks are monopolistic) means that they are able to pay massive bonuses, and pass costs onto the rest of us, without fearing that we’ll go somewhere else.

The money for their bonuses comes from all of us – from right across the economy. We don’t have a choice about whether or not we buy services which are more expensive because of this monopoly, or work for people who pay us less because of it.

So, sure, it’s not great that the public sector is  perpetuating inequality by paying it’s managers much more than those they manage. But in the ranks of the overpaid, vice-chancellors come a long way down. You buy their services through taxes. You buy bankers services through, well, pretty much everything else you pay for. But both draw their salaries from your hard earned cash. And bankers take much, much more of it.