Why Public and Private Schools Coexist: A Microeconomic Model of Household Choice and Government Policy

This paper studies the interaction between the private and the public sector in determining the supply and segmentation of education in modern economies. We develop a theoretical model in which the private and the public sector offer education as a relatively homogeneous good. In our model, the distribution of preferences for the private and public choices determines the stratification of the choice of education. Our analysis shows that increases in income taxation reduce the demand for private and public education but increases tax revenue and the supply of the public sector, showing a tradeoff between access to education and welfare changes associated to the net incidence of taxation and the supply of a public good. In our model, the private sector helps to improve the efficiency in the supply of education while the government intervention improves access leading to a more equitable allocation of resources in education. In our analysis income tax rates are associated to the proportion of households choosing both education in the private and public sector, which might help to evaluate the efficacy of government intervention in education.