Initially, the government may grant incentives in the form of tax exemptions (land subsidy and/or stamp duty reduction, special loan rates, zero income tax, etc.) and benefits (educational subsidies, etc.) to the actor. private that is setting up the new school. This model school will primarily appeal to a sizable segment of the market made up of those eligible and capable students who have been denied admission by existing and sought-after schools. It will be differentiated based on the sustained delivery of a unique value (for example, innovative teaching methods and curriculum, superior faculty, points of contact, such as not only a better teacher-student relationship, but also ways to measure the effectiveness of such contacts and, finally, sufficient rigor as reflected by academic results). This incentive will be in exchange for a commitment to provide quality education consistently and indefinitely after start, with the provision of regular and strict checks and balances by the government. This model school will have earned its credibility as a provider of quality education by the end of the benefit period and will therefore enter the market to compete alongside established players. Legislators can judiciously decide the tax exemption period and benefits based on the educational horizon that the school needs.
The government can also regulate the privatization of such schools by imposing a sanction of full benefits and revoking the fiscal moratorium with payments that include fines and interest, in case the schools do not comply with the norms and standards committed on the on the basis of which they obtained their privileged status. at start-up to earn tax holidays. This regulation must exist indefinitely for the model school from its creation. The government can create an effective audit framework for this.
When tax exemptions and benefits are in place: Due to the benefits received, the model school will incur lower total costs and therefore charge a lower price for education. The school will then match the marginal cost of providing an educational service to a student and the marginal revenue gain per student (no after-tax profit) with a lower marginal revenue, implying that the school will offer fewer seats than a market participant. However, this should be offset by optimal provision of seats under efficiency conditions, as the absence of taxes prevents deadweight loss. Since a proliferation of such schools is expected, the total amount of seats created will increase the net supply. On the other hand, since the lower price of education will come with the promise of rigor and unique value, the school may attract deserving and eligible students whose parents are concerned about enrolling their wards in the new incoming schools due to lack of credibility. . . These parents will now see enrollment in school as a good proposition, as a quality education is promised without questioning lower levels of willingness to pay. The demand curve of this segment is relatively very elastic, since parents would probably be interested in this proposition only if the price is lower than what is charged by market participants. The school will now potentially be able to admit its planned intake volume of students (the school will have discretion to decide whether or not a student’s merit meets the admission criteria, so there is no compromise on quality).
The effect of taxes is illustrated in annexes 1 to 3.
Seat price at established school in the market (INR): 35,000
Price of space in model school (INR) receiving benefits and tax exemptions: 27,000
Opportunity cost (place price in the established school) (INR): 35,000
Marginal Profit (TIN): 9,000
Parents’ WTP to take seat of model school (INR): 30,000
Figure 1: Pricing per seat at our model school can do a good job of attracting parents with rationalized willingness to pay toward schools without credibility, as shown in this example
Seat price at established school in the market (INR): 35,000
Price of space in model school (INR) NOT receiving benefits and tax exemptions: 29,000
Opportunity cost (place price in the established school) (INR): 35,000
Marginal Profit (TIN): 7,000
Parents’ WTP to take seat of model school (INR): 30,000
Income tax @ 33%: 2,310
Marginal PAT (INR): 4,690
Exhibit 2: If taxed, the price of the seat at our model school challenges parents’ willingness to pay and the profitability of the school, as shown in this example
Total revenue > Variable cost; Price > Average Variable Cost
Annex 3: Conditions for the short-term viability of the school may be threatened by deadweight loss
After the tax holiday and benefit period has ended: Our model school must have performed in accordance with the commitment under which the tax holiday and benefits were granted. If the school has established that it has delivered clear and demonstrable value by meeting its commitments, at this stage the school can increase the price of its seats above their current value, but not as much as that of its most important rival in the market. market. This higher price will support profitability at higher costs after profits and tax breaks have been removed. Likewise, the highest price will come from the credibility power gained by the school in the period in which it received the benefits. If the following conditions are met at this new price, the school will decide to enter the competitive market as a price taker: Projected total revenue > New total cost; New Price > New Total Cost; Projected Total Revenue > New Variable Cost; New Price > New Average Variable Cost
The “New” values arise because we assume that the school will now expand to generate a maximum number of seats needed to achieve the new marginal revenue condition equal to the new marginal cost.