Black and white families are heterogenous both in income and ability and simultaneously decide where to locate in the city and which school (private or public) to send their children. We show that, in equilibrium, despite the tuition fees imposed by whites, some black pupils may attend the private school. In fact three different equilibrium regimes can occur: either all, some, or none of the black pupils attend the private school. In all three cases, white families reside close to the private school attended by their children whereas black families locate further away. This market solution is shown not to be optimal, one of the reasons being that whites overprice education in order to limit black attendance at the private school, protecting their children from negative human capital externalities. Three types of education policies publicly financed by an income tax are then considered: transportation subsidies, private-school vouchers and public school spending. The efficiency of such policies depends on the fee-setting behaviour of whites, which strongly varies from one policy to another.
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Find related papers by JEL classification: H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General I20 - Health, Education, and Welfare - - Education - - - General R14 - Urban, Rural, and Regional Economics - - General Regional Economics - - - Land Use Patterns
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