Abstract
AbstractPublic services in the United Kingdom have been transformed over the past 25 years with the introduction of market-oriented solutions into their provision. This has been characterized 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 global 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 policymaking 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 care, social care and education (referred to as competition in the market). This article aims 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 internalize the full social benefits of their actions; hence, it may be welfare-enhancing for society to coerce them to “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, this article discusses when public service markets (PSMs) are likely to be an effective method of achieving public policy objectives, and when they may not be. We analyse the implications for the institutional and legal framework, funding oversight and regulation of PSMs as a result of their transformation into quasi-markets. We conclude with some suggestions for those charged with overseeing PSMs in practice based on this analysis.
Highlights
In the case of utilities, the goods are typically well defined in their characteristics, and price and output decisions are the result of demand and supply market forces, except for a few price regulated monopolies
We see that health-care spending has hovered to around 7.5% during the last few years, education has declined from 6% to just over 5% with plans to further reduce it in the coming years, while welfare has been reduced from 7.3% in 2010 to 6.5% in 2014 with a further planned reduction to 6% in 2016
Given that the newly constituted competition authority in the United Kingdom, the CMA, has an obligation to oversee the development of competition and consumer choice in public service markets (PSMs), and the UK’s NAO has been working on developing an analytical framework for evaluating whether such markets provide value for money for the taxpayers when auditing such markets, our article is a first step into providing a conceptual economic framework for analysing and evaluating PSMs
Summary
In the case of utilities, the goods are typically well defined in their characteristics, and price and output decisions are the result of demand and supply market forces, except for a few price regulated monopolies. In the early years of deregulation in utilities, as the user is typically the payer, well-established techniques of price cap setting (for example, RPI-X) were in place in these market segments where competition was not yet effective to avoid monopoly power abuse of buyers by sellers. The segments where this still applies today are the infrastructure segments with natural monopoly characteristics such as transmission or distribution companies in energy; typically the buyers in such price regulated segments are not the end users, but upstream and downstream companies. Price caps were removed in markets such as retail gas and electricity, generation, telecoms and so on, while the role of the regulator has evolved to one of both providing information to the customers to alleviate their information asymmetries by enabling them to make effective choices, and enforcing competition using concurrent competition powers
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