(Mason 2010) Public options: the general case

Mason, J. W. Public options: the general case. Slack Wire. 2010 Sep 5. Available from: http://slackwire.blogspot.com/2010/09/public-options-general-case.html. Accessed
2011 Nov 29. Archived by WebCite at http://www.webcitation.org/63ZXiYaVK.

Using the public funding of education as an example, Mason argues that public funding of a social good is almost always more efficiently carried out through direct subsidies to producers, rather than by subsidies to consumers. The supply of most publicly funded social goods is much less elastic than the demand, at least in the short term. That is, the short-term supply of such things as healthcare, urban housing, or university research and teaching is largely independent of the current market price, while the demand is highly sensitive to changes in price. Under such conditions, subsidies to consumers will merely result in price increases, and the producers will pocket the subsidies as additional economic rent, while the amount paid by the consumer remains unchanged. Rapidly rising tuition under public education funding through grants and loans is consistent with this prediction. On the other hand, direct subsidies to producers (such as lowered public-university tuition via direct subsidy to public universities) drive down the overall market price through competition and result in genuine savings to consumers.



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