rationale - PUBLIC SERVICES: INTERVENTION THE RATIONALE FOR...

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PUBLIC SERVICES: THE RATIONALE FOR GOVERNMENT INTERVENTION Summary markets usually work well, ensuring an efficient allocation of resources between different consumption and investment activities; however, there are many circumstances in which market forces, left to themselves, will fail to maximise economic and social welfare and, as a consequence, there will be a case for Government intervention; there are efficiency, equity and ethical arguments for Government intervention, though since Government intervention has costs as well as benefits none of them is a sufficient reason for intervention; the efficiency arguments for Government intervention include : the existence of public goods, externalities, imperfect competition and imperfect information; the efficiency arguments for Government intervention most relevant to public services such as health and education are externalities, imperfect competition and imperfect information; imperfect information is particularly important not only because it may contribute to imperfect competition, but because it may undermine the efficient functioning of insurance and capital markets on which efficient provision of health care and education depend. As a consequence, health insurance may not be available at any price, for example, for high cost medical conditions of uncertain likelihood; there are a range of equity arguments for Government intervention including vertical and horizontal equity; social inclusion and intergenerational equity. cash benefits are to be preferred to benefits in kind as a means of redistributing income unless there are merit good, political economy or access arguments for using benefits in kind; ethical considerations may also lead to Government intervention. For ideological reasons (beyond the scope of this note), some people may be averse to market provision of health care or to the involvement of profit-making providers. Others may not wish to see markets operating (however economically efficient) in for example human blood, human organs or human embryos. Introduction 1. Politics has clearly played (and continues to play) a key role in determining the respective roles and sizes of the public, private and voluntary sectors. But, in recent decades (particularly following the failure and collapse of the former planned economies of Eastern Europe and the former Soviet Union), there has been a presumption that markets are generally :
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the most efficient mechanism for allocating resources between different activities (both consumption and investment); and the most effective mechanism for creating and increasing national income. 2. There is, nonetheless, a substantial and well-established body of theory and evidence which suggests : there will be many circumstances in which market forces, left to themselves, will fail to maximise economic and social welfare; and, as a consequence, there will be a case for Government intervention. 3.
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rationale - PUBLIC SERVICES: INTERVENTION THE RATIONALE FOR...

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