Question

A simple subsidy (s) reduces the price of a good from P to P-s. On the other hand, a voucher scheme grants to the consumer the ability to consume a stated quantity of the good (label it X1s on the horizontal axis) in exchange for the voucher (which has no cost). Assume the high school graduating class of 2018 in Columbia received a voucher that would cover all tuition and fees for either 60 hours at a community college or 30 hours at a state university.

a. Illustrate and explain why a voucher scheme would be particularly effective in encouraging the consumption of the vouchered good for consumers who would otherwise have chosen little or none of the good. The voucher has no cost to the consumer and it cannot be sold (4 points).

b. Explain how introduction of this voucher into a market where it did not exist before will affect the market price of community college or university education and the feasible budget set for the consumer

Answer 1

a. There are many benefits associated with the voucher scheme for the target consumers which may result in encouraging the consumption of vouchered good. The voucher can be be used only for the good for which it is available, also it can’t be sold for cash or other benefits. Thus the holder of voucher will have to either consume the intended good or the voucher will go waste. This will encourage the good’s consumption. Moreover the voucher means no cost for consumers. Thus this will make the good available to the people who want to consume it but can’t afford it otherwise at no cost. So such consumers will add to the higher consumption of that good. Also some others who can afford it but do not want to may also get attracted to the good as it entails no cost now.

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b. Introduction of such voucher into the market where it did not exist before will help the market price of community college or university education to go down as a part of the cost will be borne fully through voucher. Thus the consumers will have to pay less overall. Similarly the budget of the consumer will have positive effect as now they will save money on university education as a part of the cost has been borne through the voucher. The consumers will be able to save more money on the good and thus will have more money to spend on other items.