With imperfect markets for the services of the higher education sector, it is important to assess the effectiveness of institutions. Previous studies have analysed the costs of universities but only one, to our knowledge, their efficiency. In this paper, we examine the costs and efficiency of institutions of higher education as suppliers of teaching and research using the method of stochastic frontier analysis. This paper is unique in that it investigates the impact of staff and student characteristics on efficiency. We find that there is inefficiency in higher education. This result is robust to the inclusion of a qualitative measure of output into the cost function. There is also evidence of convergence in the inefficiency of institutions, implying that the less efficient institutions are Ôcatching up' with those nearer to the cost frontier. Our analysis suggests that the anticipation of the introduction of tuition fees may have led to a shake-up in the less efficient universities. However, the results suggest that this effect was short-lived and offset by the more efficient universities relaxing somewhat.