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Public Policy: Using Market-Based Approaches would not be considered politically acceptable. However, even in these cases where the service is to remain in public hands, it can be possible to use carefully targeted market-based mechanisms to deliver a more efficient and customerresponsive service. This can be done by introducing what we term ‘user choice’. At one extreme (a so-called ‘command-and-control economy’), the government decides who gets which service, at which location and at what time. With this system, the citizen is effectively presented with a ‘take it or leave it’ choice. For example, consider the case of state-provided nurseries. In a command-andcontrol system, the state would tell parents which nursery their child has a place at. In such a system there is no competition between nurseries and parents have no choice where to send their child. As a consequence, there is little incentive for efficiency on the part of nurseries, apart from any intrinsic reward in providing good services. The situation is significantly different under a ‘user-choice’ system. Under a user-choice system, resources follow the citizen rather than the citizen following the resources. Government commitments to supply given services (e.g. the government will provide free nursery places) are expressed in terms of citizen’s ‘entitlements’ to a given good (i.e. each child is entitled to a nursery place) that have an (implicit) monetary value. In the example of nursery care, this can be seen as analogous to a system where each citizen has a ‘voucher’ (whether explicit or implicit), which can be exchanged in return for the specified service. User choice could be introduced in a system of purely public provision; it could be introduced by selecting providers from the private sector; or it could be introduced in a system that allows users to choose between both public and private sector providers. For example, the ‘nursery voucher’ could be exchanged for a place at either a state or privately run nursery. If the rationale for intervention is to address concerns over the equity of provision, then this could be addressed by providing each child with a voucher (or possibly providing vouchers, or higher value vouchers, only to poorer children). There is no reason to restrict the use of the voucher to public sector providers. 33 BENEFITS Introducing user choice can generate benefits through both the demand-side and the supply-side of the market for the publicly provided good or service concerned. The main benefit achieved through both channels is improved efficiency, and so it is worth briefly considering the different types of efficiency that can be achieved in an economic system. The first of these is allocative efficiency: 34 this refers to efficiency in the allocation of scarce resources amongst alternative uses. In an allocatively efficient outcome, no one can be made better 33 Nor is it necessary to operate such a scheme by issuing physical vouchers to parents. A similar result can be achieved without vouchers if all nurseries, state and private-run, receive a given amount of funding per child. The only difference in this case is that private-run nurseries receiving funding must commit to not charging fees for places. 34 Also known as Pareto efficiency. 50
off by transferring resources from one activity to another without making someone else worse off. Productive efficiency is a pre-condition for allocative efficiency, and refers to efficiency in production. It occurs when a specific outcome or level of output is achieved using the most cost-effective means. An economy can achieve both allocative and productive efficiency in the short run whilst still being inefficient in the longer-run, for example by not spending enough money on research and development. Long run, or dynamic efficiency, refers to the efficient use of resources over time and ensures, for example, that new products are designed to meet evolving needs and new production methods are developed to lower future production costs. Supply-side benefits User choice provides direct incentives for public sector organisations to provide a service that responds to the needs of users. Many of the benefits from introducing choice derive from the competitive stimulus that choice applies to service providers. The benefits of competition have been discussed earlier in this report, and include improved resource allocation (allocative efficiency), an improved responsiveness of providers to user preferences, and sharper incentives for quality, productive efficiency and innovation (long-run efficiency). Providers offering a poor service will attract fewer customers and consequently fewer funds than those providing a superior service. The system consequently can give clear and direct feedback on the relative performance of a unit in a way that is not visible under a command-and-control system. This benefit can help solve the problem of a lack of comparable performance measures, which can be the case in the public sector. 35 Improving quality of public services is obviously of merit in itself, but may also lead to improvements in measured outcomes. For example, in the context of education, Hoxby (2003) notes that schools may be forced to issue more information in order to attract parents: better-informed parents are then likely to become better ‘customers’ with positive impacts on student performance. Demand-side benefits Section 7 – Market-Based Mechanisms Even if the increase in competition created by a user-choice system is minimal, encouraging customer choice can improve allocative efficiency by revealing information that may not be immediately visible in a command and control system. For example, a centrally administered allocation of places may result in a suboptimal allocation of resources if it does not take individual preferences into account. As Bradley and Taylor (2002) note in the context of education, if parents and students have less control over their choice of school, there is a greater possibility of mismatch between student and school and therefore of poorer student performance. A system that involves a role for customer choice can help prevent this problem. 35 Tirole, J. (1994) ‘The internal organisation of government’, Oxford Economic Papers 46. 51
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DTI ECONOMICS PAPER NO.14 Public Po
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DTI ECONOMICS PAPER NO.14 Public Po
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Contents Acknowledgements vi Forewo
Page 7 and 8: Contents Section 11 Emissions Tradi
Page 9: Foreword There is increasing intere
Page 12 and 13: SECTION 1 Introduction and summary
Page 14 and 15: Public Policy: Using Market-Based A
Page 22 and 23: SECTION 2 Using market mechanisms U
Page 30 and 31: SECTION 3 Lessons for the design an
Page 40 and 41: SECTION 4 Introduction This part of
Page 50 and 51: SECTION 7 Market-Based Mechanisms W
Page 78 and 79: SECTION 8 Framework for assessing m
Page 81 and 82: Part IV Case Studies 73
Page 83 and 84: ● the Green and White papers behi
Page 85 and 86: A prison failing to deliver on its
Page 87 and 88: Table 9.3 Companies providing priso
Page 89 and 90: Section 9 - Competitive Tendering o
Page 91 and 92: detect any deviation from a collusi
Page 93 and 94: at HMPS began as an equal mix of th
Page 95 and 96: (e.g. lighting). This impact could
Page 97 and 98: MARKET POWER The full benefits of c
Page 99 and 100: However, it should be noted that te
Page 101 and 102: on competition is uncertain. The ab
Page 103 and 104: Controlling for problems of asymmet
Page 105 and 106: Procurement process design One way
Page 107 and 108: however, financial deductions are m
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Section 9 - Competitive Tendering o
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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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Section 9 - Competitive Tendering o
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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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