Higher education falls outside the ambit of merit category since the personal benefit from higher education exceeds the social benefit. In this milieu, the heavy spending on higher education by the government led to some structural changes withdrawing the huge subsidy elements and allowing the entry of private providers in higher education. However there are fairly large amount of subsidy on higher education even at present. The rationality of subsidy as well as fee can be found out only in terms of the cost incurred for providing the education and comparing it with fee collected from the student. The paper is an attempt to find out the unit cost of providing medical education particularly the MBBS course in Kerala and the rationality of the fee charged by the government and self financing institutions. The study found that there is a mark-up profit for the self financing institutions and at the same time government has a heavy spending burden.