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Public service markets: their economics, institutional oversight and regulation

Dassiou, X., Langham, P., Nancarrow, C. , Scharaschkin, A. & Ward, D. (2015). Public service markets: their economics, institutional oversight and regulation. Palgrave Communications, 1(1), article number 15035. doi: 10.1057/palcomms.2015.35


Public services in the UK have been transformed over the past 25 years with the introduction of market oriented solutions into their provision. This has been characterised by a shift away from state provision to independent providers, and by the introduction of competition and choice. This shift was partly ideologically motivated and partly driven by budget cutting considerations following the financial crisis. As such it has been lacking a comprehensive economic justification or method of analysis. It is now commonly accepted that the language of economic markets is essential to frame arguments about how effectively public services are achieving their intended outcomes.

Using market language and concepts may not always be comfortable for those from a traditional policy-making background. It can nevertheless be very useful when designing investigations into the effectiveness and value for money in the mechanisms of delivery of such services, whenever these services entail a degree of user choice as is currently the case in large parts of health, social care and education (referred to as competition in the market). Our paper wants to provide a conceptual basis on the way of thinking in these terms. We provide a description of the current state and then comment on the desirability of this quasi market approach. Uniquely in the literature, we analyse the expected and desired developments by distinguishing between choice and compulsory merit goods.

In choice merit goods markets many users are unable to choose effectively because of the existence of a number of demand side or supply side market failures. Moreover, conflicts may exist between how service users actually make choices, and policy objectives such as universality or equity which may not be achieved simply by ‘leaving it to the market’.

The users of compulsory merit goods are typically a minority and unable to internalise the full social benefits of their actions; hence it may be welfare-enhancing for society to coerce them ‘consume’ these services. As choice cannot be an objective, the commissioning (competition for the market) or direct provision by the state of such goods may meet public policy objectives more effectively than the market mechanism alone.

Building on these foundations the paper discusses when public service markets are likely to be an effective method of achieving public policy objectives, and when they may not be. Our paper analyses the implications for the institutional and legal framework, funding oversight and regulation of public service markets as a result of their transformation into quasi-markets. The paper concludes with some suggestions for those charged with overseeing public service markets in practice based on this analysis.

Publication Type: Article
Publisher Keywords: Public service markets; users versus buyers; choice versus compulsory merit goods; principal-agent; purchaser-provider separation
Subjects: H Social Sciences > HB Economic Theory
Departments: School of Policy & Global Affairs > Economics
SWORD Depositor:
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