Public Policy: Using Market-Based Approaches - Department for ...

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SECTION 1 Introduction and summary Introduction This report, commissioned by the Department of Trade and Industry, examines how competition and market forces can be used to improve the way that public policy is implemented. Public policy often involves either the direct provision of services by the public sector, or the public sector regulating how the private sector behaves. For some services, this has involved replacing the market with administration by the public sector, so that public-sector officials ultimately decide how much of a service is provided. However, public policy interventions can instead be designed in ways that: ● introduce competition between service providers; ● allow individuals a degree of choice over the services they receive and who provides them; or ● create markets where rights and obligations can be traded. We call these policy designs ‘market-based mechanisms’. Economic theory suggests that market-based mechanisms can have advantages over more traditional policy designs. In this report we draw out the main conclusions from economic theory and examine whether the expected benefits from using market-based mechanisms have been realised in practice. We also examine the practical problems that can arise when implementing market-based mechanisms, and suggest how these issues can be addressed to maximise the benefits from using a market-based mechanism. How we carried out this study This study has involved reviewing previous research and conducting a series of case studies of the use of market-based mechanisms in the UK. We have reviewed research on the theory of market-based mechanisms, and also previous studies on the use of market-based mechanisms in the UK and other countries. We then examined three examples of the use of market-based mechanisms in the UK to assess whether the outcomes in these cases matched the expectations we would draw from economic theory and previous experience. For each case study we interviewed Government officials involved in the design and implementation of each mechanism. We also interviewed private-sector firms and organisations that were affected by the mechanism. In addition, we 4
eviewed previous reports and studies on the effects of the market mechanism. We believe that the combination of these different viewpoints has enabled us to take a balanced view of the overall effects of each mechanism. The three case studies involved three types of market-based mechanisms, which are typical of the mechanisms used in the UK and other countries. ● Competitive tendering: where private-sector providers are invited to compete to become the provider of a particular public service. We examine the competitive tendering of prison services in England and Wales. ● User choice: rather than providers competing to become the monopoly suppliers of a particular public service, the users of the service are allowed to choose among the rival suppliers of the service. We examine a novel example of this mechanism, where potential tenants of social housing have been given the opportunity to bid for vacant properties. This scheme is known as ‘choicebased lettings’ in the UK; and ● Tradable permits: firms subject to regulation are given certain rights that they can trade amongst themselves. This mechanism has been used in some cases to control pollution. Firms are given tradable permits that allow them to produce a given level of pollution. Firms that can control their emissions more cheaply can profit from doing so by selling their excess permits to other firms. We examine the UK emissions trading scheme, which involves the trading of permits to emit greenhouse gases. In each case, we examine: ● the underlying rationale for public policy intervention; ● how the mechanism was implemented; ● practical implementation issues and how these were resolved; ● benefits from the use of a market-based mechanism; and ● lessons for the future use of similar mechanisms. Key lessons Section 1 – Introduction and summary Using a market-based mechanism in place of traditional policy designs can create significant benefits, in the form of lower costs and better services. These benefits come from greater competition among suppliers and greater choice for consumers. 5
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Page 5 and 6: Contents Acknowledgements vi Forewo
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Page 9: Foreword There is increasing intere
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SECTION 8 Framework for assessing m
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Part IV Case Studies 73
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● the Green and White papers behi
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A prison failing to deliver on its
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Table 9.3 Companies providing priso
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Section 9 - Competitive Tendering o
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detect any deviation from a collusi
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at HMPS began as an equal mix of th
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(e.g. lighting). This impact could
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MARKET POWER The full benefits of c
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However, it should be noted that te
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on competition is uncertain. The ab
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Controlling for problems of asymmet
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Procurement process design One way
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however, financial deductions are m
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The Independent Monitoring Board at
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Figure 9.1: Difference between the
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‘While there were staff in the pu
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design the invitation to tender and
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and demand conditions. Second, we d
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DEMAND Anyone can apply to a local
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● Rent deposit guarantee by the l
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The Green Paper stated the Governme
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It was not an objective of ODPM or
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DESCRIPTION OF MARKET MECHANISM The
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Once the outcome is determined, fee
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DEVELOPMENTS OVER TIME The major mo
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Concerns about capacity constraints
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from those already located within t
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In several areas, registrations by
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Controlling for information problem
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extent though, it was competition b
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Section 10 - Choice-Based Letting i
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levels are reducing and new tenants
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desired effect of limiting points-c
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efficiency savings in some areas. T
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SECTION 11 Emissions Trading Introd
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Section 11 - Emissions Trading coex
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Section 11 - Emissions Trading emis
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A more detailed and diagrammatic de
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The costs of monitoring and reporti
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INITIAL ALLOCATION OF PROPERTY RIGH
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only 242 in the second year. The di
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COST-EFFICIENT EMISSIONS REDUCTIONS
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consultants to Defra of £11 per to
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Participation has helped us to rais
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Section 11 - Emissions Trading emis
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SECTION 12 Issues in the implementa
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