Look again - they are rejecting the students who pay the lower, government tuition, and accepting those who will pay the real cost.
Market forces are at work.
You have two groups:
Group A is limited to in state only and pays at rate Y.
Group B is limited to out of state only and pays at rate 2Y.
Group A is restricted from participating in Group B's pay plan and vice-versa.
The number of participants in each group is fixed and being restricted by artificial means (government control).
Your comment regarding free market forces would be correct only if Group A was given the option of participating at the rate paid by group B.
When one controls market forces by government fiat, "free market rules" are no longer applicable.