The Supply Side of School Choice: What Happens To Private School Tuition When Demand Grows?

Time to bust out some graphs

When policymakers talk school choice, the conversation usually centers on families: Will parents be happy? Will kids thrive? Will public schools finally get their act together? But there’s a blind spot that’s long overdue for attention: What happens on the supply side? If a flood of students wants new options, can the market actually deliver?

One possible consequence of choice policies is that private school tuition prices may rise, to some extent, in the short term. (There’s limited empirical evidence on this topic—see here (and a response here) and here—which I’ll leave for a future Substack post). But here’s the thing: those price shifts are exactly what you’d expect from a basic Econ 101 textbook. If you dramatically boost purchasing power without expanding the number of available seats, schools may raise tuition. The real question isn’t whether prices rise temporarily—it’s whether supply can catch up and bring those prices back down. That’s the dynamic policymakers need to understand if they want choice to be more than just a headline.

Economic Theory and the Supply Response

At the core of economic theory is the principle that when demand increases, prices tend to rise, and suppliers respond by expanding output. This framework applies to education and school choice just as it does to other goods and services.

When states enact a school choice policy such as vouchers or education savings accounts (ESAs) that allow families access to public funds, the purchasing power of families increases. Subsequently, demand for educational services like private schools increases.

Economic theory predicts that universal school choice policies will invite greater supply-side response over time compared to smaller programs, such as those open to only students with special needs or students from low-income families. Providers are more willing to enter when the potential market is large and stable. By contrast, small or narrowly targeted programs generate less certainty and smaller markets, which may not justify the costs and risks of starting a new school.

Economic theory predicts that in the short term, both targeted and universal choice programs will increase tuition prices to some extent. In the short term, supply is relatively inelastic. Private schools can’t instantly add seats, build new classrooms, or hire more teachers. As a result, families at some schools may face higher prices and limited availability while the financial assistance from the choice program may or may not cover the new higher tuition.

With universal programs, as time goes on, private schools will expand, new schools will open, and new educational service providers will enter the marketplace. Entrepreneurs, organizations, and service providers may see an opportunity to serve students who need specialized learning, convenience, or flexibility, and who are dissatisfied with traditional public schools. During this period, the price of tuition will stabilize and may even come back down. Moreover, the entry of various educational service providers beyond regular private schools, as with an ESA program, puts additional downward pressure on school tuition and other educational service prices. This is how competitive markets work.

Let’s look at this framework using a simple supply-demand graph to see how this might play out. The chart below illustrates how supply and demand interact in the private education market when a universal school choice policy is introduced.

• Before the policy is enacted, the market is in equilibrium (Point A), where the original demand curve (D1) intersects with the original (short-run) supply curve (SSR). This reflects the pre-policy tuition level (P1) and quantity of private school seats.
• After the policy is introduced, more families have access to public funds to pay for private education, so the demand curve shifts to the right (from D1 to D2). In the short run, because the number of available seats is relatively fixed, the market moves up along the original supply curve (SSR) to Point B. At this point, tuition rises from P1 to P2 and a number of new students are accommodated—but many families may still be priced out or placed on waitlists.
• In the long run, the higher tuition and sustained increase in demand encourage new schools to enter the market and existing schools to expand. This causes the supply curve to shift out from SSR to SLR, leading to a new equilibrium at Point C and bringing the price down to P3. At this point, the market offers more private school seats at a lower price compared to the short-run increase at Point B.

This progression—from A to B to C—demonstrates the difference between short-run price pressure and long-run market adjustment. It also highlights the importance of policies that make it easier for new providers to enter the market and meet rising demand.

Figure 1: Private school market response to universal school choice policy

When school choice increases purchasing power, the demand curve shifts outward. In the short run, this leads to higher prices (P1 to P2) and a movement along the existing supply curve (SSR). In the long run, new providers enter the market and the supply curve shifts outward (SLR), stabilizing and decreasing prices (P2 to P3) while expanding access.

Some important caveats and considerations to note here. First, the long run price might not rise at all. Using the above figure to illustrate, it’s possible that supply response induces a movement from point B to point C where C occurs at the original price (P1). The chart depicts a particular case where the long-run price lands somewhere between the original equilibrium price and the short-run price. It’s also possible that the long-run price drops below the original (pre-choice policy) price.

How much prices increase in the short term depends on the price elasticity of supply, or a measure of how responsive school providers are to changes in price.

• If supply is inelastic (a steep curve), small demand increases cause large tuition hikes.
• If supply is elastic (a flatter curve), providers can expand more easily, and price increases are smaller.

Elasticity of demand, or how sensitive families are to changes in tuition, also plays a role in shaping outcomes. Together, the elasticities of both supply and demand help determine how prices and access shift in response to school choice. For choice to work in practice—not just in theory—both sides of the market need to be responsive.

The elasticity of supply in education is shaped by factors such as how easily new schools can enter the market—things like low barriers to entry, access to facilities, regulatory and accreditation requirements, access to capital, and whether providers believe the program will be stable and long-lasting. In other words, how much tuition rises after a choice policy is enacted isn’t set in stone—it depends on how easily new schools can enter the market. The more flexible and responsive the supply side, the less tuition prices will increase. Thus, policymakers who want to keep prices in check should focus on making it easier to start and expand schools.

Finally, this economic framework assumes profit maximization, and private schools are mostly nonprofit. This framework, however, also works for nonprofit private schools. While they’re not driven by profit, they may raise prices in the short run because the higher price level at P2 enables them to cover their costs and pursue their non-pecuniary goals—like serving more students while covering costs. In the longer term, prices would come back down due to competitive pressure from increased entry in the marketplace.

Challenges and Frictions

Even under universal choice, the supply response is not automatic. Regulatory barriers, zoning restrictions, facility costs, and staffing shortages can all delay or dampen the growth of new schools. Furthermore, many new providers may be small startups that need time to stabilize. This creates a lag between policy enactment and observable changes in the education landscape.

Another challenge is affordability. While an ESA or voucher may cover part of the tuition, some families may need to pay the remainder out of pocket. Without philanthropic support or tuition assistance, low-income families might still be priced out, even if supply expands. Differentiating ESA amounts for more expensive to educate students can help.

Planning for Growth, Not Just Demand

If policymakers want school choice to succeed, they must think beyond demand and actively consider the supply side and long-term effects. That means designing programs with stability, ensuring that funding levels are sufficient to attract new providers, and clearing away unnecessary regulatory barriers that deter school startups. It also means collecting and analyzing data on provider growth, enrollment trends, and price changes over time.

School choice isn’t just about giving parents more options—it’s about making sure those options actually exist. When demand grows but supply doesn’t, families get stuck. For school choice to truly work, both parents and providers need room to move.

This article was originally published on our Substack.