Answer to Question #45462 in Microeconomics for Nathaniel

Question

Still another consideration is that government spending on subsidies or vouchers must ordinarily be financed by taxes, say on income. Show the effects upon a consumer’s market opportunity set of a tax-financed subsidy and of a tax-financed voucher.

Answer 1

If education were not subsidized, students (or their parents) would purchase education on the private market, using their own money. But with publicly funded education, the government pays for the student’s education, using tax dollars that were paid by the student. The average student pays for his education either way, either with direct fees paid to a private school, or with tax dollars paid to a public school. But with public education, the student’s choices are limited to the schools provided by the government. Simple economic logic tells us that nobody will spend someone else’s money as carefully as they spend their own, so we would naturally expect that a system of government-run schools will be inferior to what privately-operated schools would provide. We might observe, for example, that public schools will be run more for the benefit of teachers than for students.
Public financing of education is normally justified on the grounds of helping those students who are too poor to pay for an education. If there were no public schools, then poor people might save a little on their taxes, but would probably have to spend much more on private schools.
Educational vouchers are sometimes proposed as a compromise measure between the inefficient, one-size-fits-all public school system, and a system of private schools that would be of higher quality, but unaffordable to the poor.