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Public Policy: Using Market-Based Approaches Capacity constraints can also influence outcomes through the demand-side of the market. Customers who are unable to exercise their right to choice due to the existence of capacity constraints may become despondent and consider the allocation process unfair. This will lead to reductions in customer satisfaction, and may reduce policy performance against other measures if, for example, it leads to customers disengaging from the processes concerned and ceasing to participate effectively. The underlying problem here is that supply does not expand to match increasing demand, as we would expect to happen in private-sector markets. To address this problem there would need to be some mechanism to ensure that investment decisions reflect information revealed by the consumer choice ‘market’ rather than being made in isolation from the scheme. Inequality of access Where consumer choice is introduced it may be that certain members of society (those who are wealthier or better educated) may be better able to exercise their right to choose. For example, those with better access to transport may find it easier to use a hospital or school of their choice. Depending on the circumstances, this may still be a better outcome than when consumers had no choice – which in the case of education can lead to the better schools being, in effect, reserved to those who can afford to buy houses near to the most desirable schools. The problem might be reduced by measures taken to improve consumers’ ability to choose: the provision of appropriate information and access to transport, for example. Inequality can be distinguished into inequalities of opportunity and outcome inequality. Inequalities of opportunity include better access to transport links, for example, and may give rise to inequalities in outcomes if those with better opportunities are able to use them to obtain a superior result. Inequalities in outcomes can arise between individuals or between geographical regions. Geographical inequality is more likely to occur when mobility is low and users are effectively locked into their local suppliers. This can allow the market to develop into sub-sectors of under-performing suppliers located in disadvantaged areas and excellent suppliers located in more advantaged areas, with users in disadvantaged areas unable to exercise their choice by switching to a better-performing provider. Segregation Introducing user choice can lead to an increase in segregation through both the supply and demand sides of the market. On the supply side, segregation may arise as a result of discrimination by providers. This problem is linked to the capacity constraint problems outlined above and can be limited using the same controls. On the demand side, increased segregation can occur either as a direct result of the exercise of choice by individuals of the same ethnic/working/educational background, or as an indirect result of any increase in 54
inequality. Measures to limit increases in inequality can therefore be helpful in preventing further segregation. But direct controls, like quota systems, are likely to introduce other problems by reducing the amount of effective choice on offer. This suggests that a different market mechanism should be considered for cases in which segregation is both undesirable and likely to occur as a direct result of choice. Information Section 7 – Market-Based Mechanisms For user choice to generate positive outcomes, consumers must be able to make rational decisions. They will be able to do so only if they posses sufficient relevant information in a language and format they will be able to understand. Even then, consumers must still be willing to bear the costs of collecting and analysing this information, which in some cases may be considerable. Information can impact outcomes through both the supply and demand sides of the market. On the supply side, service providers must face the correct incentives to provide appropriate information to all consumers. On the demand side, consumers must be willing to gather and process the information provided. The costs of introducing choice where consumers lack the necessary information or the ability to process it will be greatest for experience goods. These are goods where consumers only learn their actual quality after purchasing them, for example health care products. In the private sector, advertising can be used as a signal for quality to help prevent consumers making costly mistakes when purchasing such goods. Because consumers will make repeat purchases of goods only if they turn out to be of high quality, only high quality firms can generate sufficient revenue from advertising to make it compatible with a profit-maximising strategy. Consumers are aware of this, and therefore expect that an expensive advertisement campaign signals high quality. 39 However, the same is not true of the public sector, where funding is often independent of performance. Public sector providers must therefore develop alternative means of signalling quality, perhaps by providing more detailed information regarding historical performance. With credence goods, 40 the provision of trustworthy information becomes even more important. These are goods where the consumer cannot assess the quality of the product, even after consumption has taken place. For example, in healthcare services, a patient may recover following his doctor’s recommendations for other reasons and yet ascribe his recovery to the high quality service provided by his doctor. The ability of a consumer to make rational choices about credence goods is therefore limited even after they have consumed the good from that provider before. 39 The concept of experience goods and the intuition behind advertising as a signal of quality was first developed by Nelson (1970, 1974). See Nelson, P. (1970) ‘Information and consumer behaviour’, Journal of Political Economy 78 and Nelson, P. (1984) ‘Advertising as information’, Journal of Political Economy 82. 40 The concept of the credence good was first introduced in Darby, M. and E. Karni (1973) ‘Free Competition and the Optimal Amount of Fraud’, Journal of Law and Economics 16. 55
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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
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Contents Section 11 Emissions Tradi
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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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Page 111 and 112: 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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