This study examines the relationship between class heterogeneity and scholastic performance in Israel's primary schools. The effect of school integration on academic achievement is explained via two main effects: (1) the "peer" effect, namely externalities that are induced by the composition of the teaching and learning environments; and (2) the efficiency effect, which reflects the reduced ability of the teacher to teach and the pupil to learn in a heterogeneous environment. This study focuses on the efficiency effect and estimates an upper bound to the "peer" effect. The raw, strong negative correlation between achievement and class heterogeneity is clearly an artifact of the association between more heterogeneous classes and lower socioeconomic status among pupils. A liberalization in the education system allowing parents more freedom in choosing an elementary school for their child is seen to be positive in terms of schooling efficiency and the implied gains in scholastic achievement. This liberalization effort is weighed against the setback in the efforts to achieve social integration through the education system and the implied, but unmeasured, benefits. (EH)