Tuesday, September 16, 2014

School choice and the free market

School choice and the free market
Melvyn D. Magree
Originally published in
the Northland Reader
now the
Reader Weekly
"School choice...whatta concept"
February 17, 2000
 Posted in blog 2014-09-16

In the debate about “school choice” the phrases “let the free market decide” and “competition will bring out the best” are often used.  What are “the free market” and “competition”?  Is “school choice” an issue that can best be determined by “the free market” or “competition”?

The definition of an ideal free market includes

• Large number of buyers and sellers
• Free entry and exit of the market
• Knowledge of all relevant prices
• All goods are “private goods”; all the benefits and all the costs are reflected in the price

“School choice” certainly involves a large number of buyers.  Students in a given urban community number in the thousands.  In an ideal market a large number of buyers would lead to a large number of sellers.

Children are required to enter the market for schools, and they aren’t free to exit it.  Even if they were to change to another school, it would be difficult to do so for many reasons until the end of a school year.  Schools take a bit of time to enter or exit the market, but many businesses do so also.

Parents and children may be able to get lists of prices of all the schools, but it is very difficult for parents and children to know all features of all schools.  The price is not only money but quality and quantity of services.

The costs of schools may be reflected in the price of tuition, but the benefits go far beyond those paying the price.  Not only do the children and the parents benefit from school, but the society at large benefits.  Companies have workers that communicate and reason well.  The community and the nation have people who can produce products, services, and ideas.  Neighbors have interesting friends.  The city, the county, and the state have informed voters.  In other words, education is not a “private good” but a “public good”.

Economists define a “public good” as being non-rival, prohibitively expensive, or having benefits that are not limited to the buyer.

A non-rival good is one that can be used by many people at the same time.  It is also available not just to the highest bidder, but to all regardless of ability to pay.

A prohibitively expensive good costs more than one person or group wants to pay.  Few people can afford all the costs of education.  Even private schools do not charge the full costs; they have endowments, scholarship funds, and general contributions.

As discussed earlier, many people benefit from an educated society, not just parents and students “buying” an education.

If something is a public good benefitting a large portion of the community, then it generally seems fair that the public pays through taxation.  If the public pays for something then the public would like to have some say in what the public good is like and how much it costs.  The most satisfactory means of expressing the public will for over 200 years has been democratic representation.  The public elects representatives charged with certain responsibilities.  The representatives determine the nature of the public good, what is an acceptable cost for the public good, and how to raise the funds to pay for it.

The representatives could decide to provide the public good through a government agency or subsidize it through a contractor.  If a government agency provides the public good, then the representatives generally do not provide subsidies for alternative provisions.  For example, if the government has a police or fire department it does not provide a subsidy for those who would have their own police or firefighters.  Should education be any different?

If schools are to be subsidized, should there be only one contractor or many?  The other argument for “school choice”, “competition,” implies that there should be many contractors for schools.  What does competition lead to?

“Competition” implies schools have competition for buyers; that is, buyers select a school.  But the reality is that students compete for private schools; the schools select the buyers.  All of the buyers cannot select the school that meets their needs.

If a product is more popular than competing products, the manufacturer can do two things: supply more product or raise prices.  If the manufacturer decides to supply more product it may be able to do so quickly.  If it decides to raise prices, some buyers may decide to go elsewhere but the manufacturer will probably retain enough buyers to have a satisfactory profit for some time or to have more money to put into improving the product.

But if a school is more popular than its capacity, it cannot meet that demand for a year or more.  Should it then raise its prices to have a higher profit or to fund additional improvements in the school?

Now if the public is going to pay for such a school through vouchers, does it pay the full cost asked by the school?  Or does it pay only a certain minimum that is guaranteed to all students.

In the first case we get into another economic idea, efficiency.  One kind of economic efficiency is low cost production.  That is, a free market will reward the lowest cost producers and punish the highest cost producers.  But if a voucher pays the price asked for by a high cost producer, do we have a free market?

On the other hand, if a voucher pays only a guaranteed minimum, then it reduces the number of buyers.  Only the children of those families who can afford to pay the difference can go to the very selective schools.  “School choice” becomes limited for the rest of the children.

©2000, 2004, 2007 Melvyn D. Magree

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