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

Public Policy: Using Market-Based Approaches
Incentives to over-consume
Whilst rationing the availability of a public good or service can lead to problems
of cream skimming and customer dissatisfaction, not rationing availability may
also generate unfavourable outcomes. This will be the case when introducing
choice creates incentives for individuals to consume more of the good or service
than would be socially optimal. Some schemes have natural limits that can be
applied to prevent this without restricting effective choice, for example allowing
a child to be enrolled in a maximum of one school at any one point in time. In
schemes where citizens can exercise choice over how much of a good or service
they consume, however, this balance may be more difficult to strike.
CONCLUSION
Introducing user choice to public services can lead to improved efficiency, a
more customer-responsive service, and confer a sense of empowerment on
consumers. However, it can also have adverse consequences in terms of
inequality and segregation, and outcomes may suffer if there are informational
failures. Our case study on choice-based lettings evaluates the evidence on all of
these issues, and looks at how user choice has been successful in the area of
social rented housing despite binding capacity constraints.
Marketable permits
Marketable permits have been used in the environmental sector as a means of
controlling pollution. In this system the total amount of pollution allowed is
‘capped’ and property rights are assigned to would-be polluters.
The theory behind marketable permits stems from Coase’s intuition that
problems caused by externalities can be resolved, without government
intervention, if there are no transaction costs. 41 Coase noted that there is always
someone who benefits and someone who loses from any given externality. For
example, a factory that pollutes a river may damage the livelihood of farmers
living downstream. If the property rights of the factory and farmers are welldefined
then the externality can be addressed by a transaction between them. For
example, if the farmers have a right to clean water then the factory owner buys
from the farmers a right to pollute (which is rational provided the benefit to the
factory exceeds the cost to the farmers). Conversely, if the factory owns a right to
pollute the farmers can pay it to stop polluting (which is rational in the opposite
case where the cost of pollution to the farmers exceeds the benefit to the factory).
41 Coase, R. (1960)’ The problem of social costs’, The Journal of Law and Economics 3.
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