Let's say the government decides to privatize schools, and offer school vouchers to parents. But since the government is a welfare state, it is being expected that the schools will not raise prices above the value of the vouchers. Do you think this will significantly hurt competition? Why?
This will certainly harm competition in that it will act as a price cieling. On one hand its costs could exceed its revenue from the vouchers and it would then either need to downside or to try desperatly to attract more students, thusly competition would be impaired because of the fact that the price could not simply be raised. It would act as a price floor if it were voluntary but the fact is that people are forced to pay so there can be no decrease in demand, the demand curve is forced to be perfectly elastic.
So it would harm competition in that prices could not flow freely upward which would thusly harm competition by restricting the amount supplied. With this being said the competition available would still increase quality.
The economic effect of a voucher is to increase the amount of spending on the item by the voucher amount. For example, if I sell gas at $1/L and you have a voucher for $1/L, I can simply raise my price to $2/L. If a price ceiling is set at $1 I essentially become a government employee paid a commission of $1/L. Public school vs. voucher private school is like 1+1+1-1=2 vs. 1+1=2.
As long as certain common-sense conditions are met, vouchers are preferable to the current state of affairs. It is true that vouchers are still a major distortion of the market. But, by way of thought-experiment, would you rather have the current food-stamp system or a chain of "public grocery stores" directly owned and operated by the government that retailed free food to ensure "universal food." As bad as food-stamps are, a public-grocery-store chain would be even worse.
Clayton -
If the schools can not raise their prices and the only revenue comes from vouches then competition would not necessarily increase. The vouchers would just be a smoke screen, it would give the apperance that the consumer is making more of a choice. I don't think there would be much difference in the competition as schools would have a fixed income and could never progress and improve to the point that would make them more competitive. As there is usually more demand than supply for schools, even the worst performing schools will have a fixed income. So there might still exist the same problems of lack of competition that exists with no vouchers.
That's what I thought. Thanks.