Fear Versus Fact: Marketplace Incentives: Choice, Competition

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This is the "Marketplace Incentives: Choice, Competition" segment from Fears versus facts about school choice: An overview of issues surrounding the effects of competition on public education

By John Garen, Ph.D.

View and download the PDF version of this report.

Marketplace incentives: choice, competition


Americans rely heavily on the free market for many goods and services. Markets work primarily because they involve a great incentive system and require “voluntary exchange.”

In order to earn income, providers must sell what someone voluntarily wants to buy. This induces the seller to provide goods that buyers value. In addition, that product or service must be as good, or better, than the competition’s. Customers reward sellers that provide a valuable and better product.

The ability of customers to spend their money elsewhere provides the backbone of the incentive system. And this articulates a key component of school-choice programs such as charter schools and voucher programs.

Charter schools only receive money for students who actually enroll. These schools can survive only if they attract and retain enough students. As in markets, charter schools succeed only by satisfying voluntary buyers, who are, in this case, parents. Private schools that might attract voucher-program students face a similar situation. Parents who become dissatisfied with a school can take their children – and money – elsewhere. Schools survive only by providing the type of schooling parents want for their children, and a better education than the competition.

Another advantage of market competition that charter schools and voucher systems emulate involves bringing new “suppliers” into the market. As with competitive markets, new schools can open in new locations or existing schools can expand. Thus, students in poorly performing schools do not remain trapped in failing institutions because of limited space in better schools. Poorly performing schools get replaced by others providing superior educational services. Also, just like in the marketplace, public schools must compete with charter-school and voucher options, thus improving the incentives for public schools to satisfy families and students.

These mechanisms evaporate when government becomes the provider of the goods or services, as with public education. Students get assigned public schools based on the neighborhood where their families live; switching schools proves cumbersome and difficult, often requiring changing residence or a stream of complaints and appeals to school officials.

As a result, the public-school revenue base – money from state and local governments – is not closely tied to how a school performs academically. This reduces the competitive pressure on schools because less reason exists to satisfy the customers – parents with students at the school – and more reason to please the political “masters” who control the funding (and who often are beholden to special interests). All of this reduces the need to perform well academically and operate cost efficiently, since approximately the same number of students – and same amount of money – show up, regardless of how well a school performs.

States often try to address these problems with a “top-down” process in which education officials develop and mandate curriculum and other programs. Such programs likely won’t succeed. Providing quality education depends a lot on family situations and students’ characteristics, including how they respond to various teaching methods. Sets of rules provided by education officials cannot adjudicate what is best for each situation. This is best done by the teachers, parents and students. Relying on programs and plans developed jointly by the schools and parents works best.

School-choice programs provide incentive to use this information effectively. Schools that do not will lose students and fail. State education agencies have neither the information to establish specific, effective education plans for individual families to follow nor particularly strong incentives to create them. Public school funds and jobs remain safe, regardless of the quality of their programs.

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