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

SECTION 8
Framework for assessing
market mechanisms
In Part IV of this report we examine a number of case studies in order to draw
lessons on best-practice in the use of these mechanisms. In this section we set
out a framework for analysing the performance of different market-based
mechanisms. We focus on two issues: the choice of market-based mechanism
and the implementation of that mechanism.
The choice of market-based mechanism
As explained in sections 5 and 6, policy makers designing public-policy
interventions have to balance two factors. Market failure (or issues of equality)
may provide a rationale for some form of intervention, but intervention may
itself give rise to government failures that may outweigh the problem that
intervention was designed to correct. This balance suggests two options:
intervening in the expectation that government failure will not undermine the
achievement of the policy objective, or not intervening on the basis that it is
better to live with some degree of market failure rather than create even greater
problems through public-sector intervention. As explained in Section 7, a third
option is to use a market-based mechanism in order to minimise the
government failure that might arise from intervention.
It follows that, in assessing the performance of a market-based mechanism,
there are two principal situations to use as a comparison: no intervention or
intervention using some other mechanism. In practice, we assume that in the
absence of a market-based mechanism the government would still have wished
to intervene in the areas we are studying (for example, because intervention had
already been taking place before the market-based mechanism was adopted) so
the appropriate counterfactual is one where the government intervenes using a
more traditional command-and-control mechanism. In the case studies below, it
is possible to identify an alternative method of intervention that has been used
in the past to achieve the same or a similar policy objective, and we use that as
the basis of our comparison.
In the case studies we therefore compare the market-based mechanism with the
mechanism that had previously been used in the same or a similar area.
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