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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.

The economic costs of voucher markets for public service provision