The Economic Costs of Voucher Markets for Public Service Provision

Voucher markets where governments subsidise the consumers of public services to give them a free choice of service provider are implemented by public authorities as a means to reap the supposed benefits of competition and choice. Such voucher markets imply economic costs for the public authority in the form of transaction costs, e.g. for preparation of quality standards and information material as well as approval, coordination and supervision of providers. However, voucher markets may also affect the public authority’s production costs through a competitive pressure for increased efficiency and/or by affecting the potential economies of scale for public service delivery. This article shows that in a voucher market without price competition voucher markets increase the public production costs of delivering home help services. Specifically, the larger the share of elderly persons who choose a private provider, the higher the public costs of delivering practical home help.