The "myth" that all universities are the same and should be funded equally is no longer credible, according to one of the academic architects of top-up fees.

In a new paper, Nicholas Barr, professor of public economics at the London School of Economics, sets outs the areas he believes the Government's review of fees needs to address, and claims that variable fees are fairer than other approaches.

"Why should fees at a local institution be the same as those at an internationally renowned university?" he asks in the journal Higher Education in Europe. He adds that it is "wrong" that a student at a small local institution pays the same as one at the University of Oxford.

He argues that financing universities through the taxpayer puts the quality of higher education at risk. "There are limits to taxation, so that with a mass system, higher education will lose in the political battle to more urgent and politically salient public spending priorities," he says.

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The existing system of loans with income-contingent repayments has not deterred students from poor backgrounds, according to Professor Barr. He describes the system as "deeply progressive" because students pay nothing until they can afford it after they graduate, and money is redistributed to help poorer people pay.

However, there is still "unfinished business", according to the paper, "Financing Higher Education: Lessons from Economic Theory and Reform in England".

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First, the fees review should look at the current cap of ?3,000, which Professor Barr thinks should be set higher to bring in more resources and strengthen competition.

Second, it should examine the blanket zero real rate of interest on loans, which he says amounts to an "enormously expensive" subsidy.

Instead the rate should be broadly equal to the Government's cost of borrowing, and there should be targeted interest subsidies for people with low earnings, he suggests.

Finally, policies to widen participation should target students at a younger age, to tackle the roots of exclusion in early childhood.

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Responding to the paper, Aaron Porter, vice-president for higher education at the National Union of Students, said that if a market were allowed to open in higher education, it would price poor students out of the more "prestigious" institutions.

He argued that the amount paid by a graduate should be directly linked to the financial benefit they have obtained from their degree, not based on "a hypothetical course price".

rebecca.attwood@tsleducation.com.