School Fees and Vouchers when Quality of Education Matters

The aim of this paper is to analyse the role that quantity and quality of education may play in the design of public policies. In our model, educated people enjoy a premium on their incomes, and education generates a positive externality for the society. Households live in two areas with different socio-economic characteristics. Altruistic parents choose both the amount and the quality of schooling they want for their children, ignoring the external effect. The latter is, instead, taken into account by the government, which is assumed to provide a composite education service that has a quantity as well as a quality dimension, and is financed mainly via taxes on the income of the parents. We investigate the effects on welfare of balanced-budget policy reforms aimed at introducing or raising i) school fees, and ii) vouchers meant to compensate the costs of attending high-quality schools. We show that, if the external effects are not considered, school fees improve private parental welfare while vouchers do not. Parental altruism is not enough to support high levels of quantity and quality of education. The consideration of social welfare, i.e. inclusive of the impact of the externality, somewhat mitigates the above results, by favouring lower (albeit positive) fees and allowing vouchers to increase social welfare under some circumstances.