Extending choice in public services is currently a popular policy, proposed in some form by both Labour and the Conservatives. A new report from Bristol University's Centre for Market and Public Organisation (CMPO) surveys the evidence from economic research on whether more choice will improve outcomes in two key public services – education and health care.

Professor Simon Burgess and his colleagues draw the following conclusions on the impact of extending choice in education and health care:

• House Price Losers from More Choice in Education – a successful choice policy in education would eliminate the advantage from living near a good school, with potentially significant effects on the housing market.

• “Parent Power” Demands Flexibility in the Supply of School Places– more parental choice in education is likely to lead to greater segregation of students by income and ability unless successful schools can expand easily, new schools can start up and poor schools can close.

• Peer Group Effects – the role of children’s peer groups is important in determining the effects of choice. The quality of peer groups may influence parents’ choices and the capacity of a school to generate good exam results.

• The Urge to Merge: How Hospitals May Evade the Competitive Pressures of More Choice – hospitals may react to the increased competitive pressures arising from the government’s choice agenda by seeking to merge: since mergers can reduce the benefits of competition, they will need to be subject to rigorous market tests.

• Creaming’, ‘Skimping’ and ‘Dumping’: Centrally Set Prices in Health Care May Be Bad for Sicker Patients – differences in the treatment of different patients are likely to emerge from the prospective price system being introduced as part of the extension of choice in UK health care.

Why does enhancing choice seem so attractive to policy-makers? The expectation is that it will improve education and health outcomes. Consumer choice creates competitive pressures, which help make private firms more efficient, and it seems easy to transfer this logic to the provision of public services. Giving service users the ability to choose applies competitive pressure to providers – schools and hospitals – and, analogously with private markets, they will raise their game to attract business.

But there are some central questions about the nature of choice in public services:

Who chooses? Choice in education means competition between schools for pupils and/or between parents for schools. The starting point is that parents choose schools. But what happens when a school is full and there is insufficient flexibility or spare capacity in the system? Schools have to ration the scarce places and this necessarily involves rules for deciding who will be chosen.

In health care, patient-driven choice tends to be limited. Payer-driven choice is the more common form and may even operate to restrict patient-driven choice. Decisions in health care typically require more specialised knowledge, and so the choice is delegated to an agent, typically in England a general practitioner (GP).

In health care, while patients are often fully insured against the price, the agent responsible for buying care will be interested in both price and quality.

What are the constraints on choice? For parents, the most obvious constraint is that their school of choice is full. Transport time and costs may be a constraint on choosing other schools, and house prices may be a constraint on moving.

In health care, the chief constraints are lack of information on the quality of care, travel costs and the other costs of using care.

Similarities and differences between choice in education and health care: The use of crude measures of quality or output give both providers of health care and providers of education incentives in a choice-based system of choosing patients or children who improve measured performance. This incentive is ratcheted up by the use of centrally set prices in health care and by the presence of peer group effects in education.

In England, the hospital market is well developed, private entry is encouraged and managers are used to operating in a market environment. In contrast, in education, market entry and exit are currently more restricted among state schools.