ECONOMIC THEORY AND POLICY ANALYSIS: CONCEPTUAL GUIDELINES FOR PUBLIC POLICY-MAKERS

Abstract: Traditionally public policy analysis has been able to employ the conceptual framework offered by the theory of market failure in order to evaluate the efficiency of market outcomes. However, until fairly recently, no corresponding analytical structure existed which could facilitate the examination of the efficiency and equity characteristics of government or non-market outcomes. Quite apart from public choice theory, an embryonic normative theory of government failure has now been developed which can act as a conceptual analogue to the market failure paradigm. At present, three theories of government failure coexist in the literature: Wolf's theory of non-market failure; Le Grand's theory of government failure; and Vining and Weimer's theory of govern- ment production failure. These models form the basis for a more universal theory of government failure. Nevertheless, in its current state of development this seminal literature can still assist in rational public policy design subject to certain caveats. Foremost amongst these is the need for policy analysts to augment the efficiency and equity criteria with some additional broader normative measures, and the necessity for care to be taken in the use of allocative efficiency as a benchmark in non-market circumstances.