Question

After a government implements a voucher program, granting funds that families can spend at schools of their choice, numerous students in public schools switch to private schools. Parents’ and students’ valuations of the services provided at both private and public schools adjust to equality with

the true market price of educational services. Is anyone likely to lose out nonetheless? If so, who?

Short answer

The government will lose its revenue equivalent to the amount of grants but other than that no one suffers any loss.

Step-by-step solution

Step 1. Definition of Market Equilibrium.

Market equilibrium is the point where the market demand equals market supply for any commodity.

Step 2. Is the grant a loss for anyone?

The government provides grants to the students so they will pay fees equal to the market equilibrium price. There will be no change in the demand and supply in the market. The government will only lose its revenue equivalent to the amount of the grants. Since this is a positive externality this small loss is justified.