City Research Online

Public Service Markets: Their Economics, Oversight and Regulation

Dassiou, X., Langham, P., Nancarrow, C. , Scharaschkin, A. & Ward, D. (2014). Public Service Markets: Their Economics, Oversight and Regulation. London: City University London.


This paper has three aims.

Firstly, it aims to show that the language of markets can help 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. This paper suggests that thinking in these terms can nevertheless be very useful when designing investigations of the effectiveness of public services, whenever those services entail a degree of personalisation or user choice – as is currently the case, for example, in large parts of health, social care and education in England.

Secondly, the paper aims to show that public service markets (public services that involve choice on the part of service users) differ quite fundamentally from private markets. Hence the conditions for the success, or failure, of public service markets to achieve public policy intentions may be different from the conditions that are necessary to foster successful (well functioning) markets in the private sector. Although there are analogies between private and public markets, some of which are discussed, the introduction of ‘market mechanisms’ into public service provision does not necessarily mean that the public service markets thus created will behave like private markets, or that policy intentions will be achieved simply by ‘leaving it to the market’. This, of course, has implications for how public service markets are overseen, managed, and regulated.

In particular, the nature of the ‘goods’ that are ‘traded’ in public service markets is often very different from those in many private markets. This paper argues that not only are public services typically merit goods (characterised by positive externalities in their consumption), but that there is an important distinction between ‘choice’ merit goods, such as education or social care, and ‘compulsory’ merit goods, such as probation services or welfare-to-work programmes. Choice merit goods could in principle be provided through vouchers or direct payments to users, although doing so would not necessarily achieve other policy objectives such as universality or equity, even if all conditions were in place for the public market to operate efficiently (in practice, this latter requirement is also unlikely to be met). There may also be conflicts between how service users actually make choices, and how the state would ‘like’ them to (for example, hospital patients may value proximity of the hospital to their home more highly than its results on clinical performance measures).

The ‘users’ of compulsory merit goods, on the other hand, may not wish to consume them, but it may be welfare-enhancing for society to coerce them to do so. The commissioning or direct provision by the state of such goods may meet public policy objectives more effectively than the market mechanism alone, as users are not able to internalise the full social benefits of their actions.

Finally, 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. Issues that arise frequently in public service markets are discussed, such as principal-agent relationships; determining the quality of complex experience goods; the existence of local or regional monopolies of provision, and monopsonies of funding; the operation of competition law in the public sector; and how to deal with provider failure. The paper concludes with some suggestions for what this all means for those charged with overseeing public service markets in practice, based both on the preceding considerations, and on empirical evidence and experience to date.

Publication Type: Report
Subjects: H Social Sciences > HB Economic Theory
Departments: School of Policy & Global Affairs > Economics
[thumbnail of SSRN-id2538532 Public Service Markets December 2014.pdf]
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