Designing A Public School Choice Program That Can Pay For Itself

Executive Summary

Executive Summary

Proposals for an educational choice program that would allow parents to choose among public and private schools with the aid of a state scholarship have reached considerable support among parents, businessmen and some teachers.

One aim of an educational choice program is to improve education by bringing competition to both public and private schools. Another is to give educational choice to as many families as possible — most of whom are now limited to just one public school because of school district rules and the cost of private alternatives.

Some critics argue that choice involving private schools would be prohibitively expensive, a conclusion they support by simply multiplying current private school enrollment by the presumed size of a state scholarship. If one, for example, multiples Nevada's average expenditure per student for FY 1992-93, by the number of private school students, the result is a daunting $50 million. But this analysis is incomplete. A choice program in Nevada would not necessarily be expensive. In fact, it wouldn't necessarily cost anything. A program's fiscal consequences depend on its design.

The model for thinking about educational choice used here is based on a distinction between two groups of potential private school students:

  • "Movers" who choose private schools if they have a state scholarship but would otherwise attend public school; and,
  • "the base group" who would attend private schools as a primary choice.

An effective choice program should improve economic efficiency in two ways. First, private schools are often more cost efficient than public schools and yield a generally better academic result. Therefore, shifting more students to the private sector improves overall economic efficiency. Second, a choice program subjects public schools to some mild competition. Since dissatisfied customers are more likely to go elsewhere if they have a scholarship, public schools are under pressure to use their input to better satisfy their customers. Moreover, the possibility of a larger number of "movers" is an important incentive for public schools to improve.

A successful "optimum" choice program requires a combination of favorable circumstances. Fortunately, Nevada has an unusually small "base group" and a finance system that assures a savings to state government from movers. Assuming Nevada also has at least moderately price-sensitive demand for private education and an adequate supply of modestly priced private schools, a choice program with unrestricted eligibility and equal scholarships has good prospects for breaking even. This is especially true of a program for elementary school students.

Since the cost of a choice program is overwhelmingly attributable to the "base group," a small "base group" offers a great advantage. In Nevada, only about five percent of students are now in private school or are home schooled; well below the national average of almost twelve percent and far less than several states that have more than 20 percent of their students in private schools. The small size of the "base group" means that a program can break even if a relatively small proportion of public school students switch. A switching rate of just 12 percent would cover the costs of 70 percent scholarships worth slightly over $2250. Contrast this situation to that of a state with 20 percent of its students in the base group. A 50 percent scholarship program could not break even unless a quarter of public school students switch, and a 70 percent scholarship program would require that more of 50% of them switch. Clearly, the conditions for low cost choice are more favorable in Nevada than in many other states.

For parents, a state scholarship is the equivalent of a decrease in the price of private education (provided, of course, that the scholarship does not cause tuition to rise). For a program to break even, parents' demands for private education has to be fairly price sensitive, or in the language of economists, demand must be price-elastic. This is the case even in Nevada, although the required degree of price elasticity is less in Nevada than in many other states because of its small "base group."

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