When can public policy makers rely on private markets? The effective provision of social services

Abstract

The privatisation of social services is being increasingly discussed. The social services market is characterised by multiple market failures, including informational asymmetries, agency problems, externalities, and distributional concerns. Consumers may care as much or more about quality of services than about price. If quality is readily observable, the government can regulate private providers to assure standards are met. But when standards are difficult to observe or when the recipient is not the agent who makes the decisions, government ownership may be preferable. This paper categorises the market situations in which government provision of social services is likely to be most versus least attractive.