The government can also regulate privatization of such schools by imposing a penalty of complete benefits and tax holiday revocation with payments including fine and interest, should the schools fail to adhere to the committed norms and standards on the basis of which solely they got their privileged status at start-up to win tax holidays. This regulation must exist indefinitely for the model school beginning from its inception. The government can devise an effective auditing framework for this.
When tax waivers and benefits are in force: Due to benefits received the model school will incur lower total costs and hence will set a lower price of education. Then the school will equalize marginal cost of providing education service to a student and the marginal revenue earning per student (there is no Profit after Tax) at lower marginal revenue which implies that the school will offer fewer seats to fill than would a market player. However, this should be offset by an optimal provision of seats under efficiency conditions as deadweight loss is prevented by the absence of taxation. Since a proliferation of such schools is expected, the sum total seats created will increase net supply. On the other hand, since the lower price of education will come with a promise of rigor and unique value, the school may be able to attract meritorious and eligible students whose parents are otherwise apprehensive to enroll their wards to new entrant schools for want of credibility. These parents will now view enrollment to the school a good proposition since quality education is promised with no challenge to lower levels of Willingness to Pay. The demand curve of this segment is relatively highly elastic, as parents would likely be interested in this proposition only if the price is less than what is charged by market players. The school will now be able to potentially admit its planned intake volume of students (the school will have discretion to decide if a student's merit satisfies admission criteria or not so there is no compromise on quality).
Effect of Taxation is illustrated by exhibits 1 through 3.
Price of seat in market established school (INR): 35,000
Price of seat in model school (INR) receiving benefits and tax waivers: 27,000
Opportunity Cost (price of seat in established school) (INR): 35,000
Marginal Profit (INR): 9,000
Parents' WTP to take seat from model school (INR): 30,000
Article Source: http://EzineArticles.com/7432297