Student evaluation of teaching (SET) is employed as an aid in improving
instruction and determining faculty teaching effectiveness. However,
economic theory indicates the existence of externalities in SET scores that
directly influence their interpretation. As a test of this existence, a
multinomial-choice, ordered data estimation procedure is employed to
identify course externalities influencing SET. These externalities include
student class standing, required courses, class size, days a class meets,
class meeting time, classroom location, and classroom design. Results
indicate that externalities have a significant impact on teaching
evaluations. Thus, failure to internalize these externalities will lead to
biases in SET and questionable use of SET as an aid in instruction
improvement and determining faculty effectiveness.