Quasi-markets
• Method of dealing with micro issues in growth of welfare
state. These are:
– inefficiency in expenditure
– moral hazard issues
– lack of achievement of equity goals
• Involve
– promotion of competition on supply side
– maintenance of tax finance on demand side
– tax finance allows equity goals to be met, plus keeping down
administration costs
– competition between suppliers to improve efficiency (note:
productive inefficiency is not a necessary consequence of
monopoly)
Criteria to assess quasi-markets
reforms
1. Efficiency: productive and allocative
(government often concerned with cost minimisation)
– responsiveness (part of efficiency if viewed as
quality of services)
– Choice (as an end in itself, or as a way of
achieving efficiency)
2. Equity
Can competition achieve this?
Conditions for success (Le Grand)
1. Competitive market structure
2. Information
3. Low Transactions cost
4. Motivation
5. Absence of Selection
1. Competitive market structure
– Le Grand (1993): Competition required on both
purchaser and provider side
– Chalkey and Malcomson(1995)
– Competition not required when bilateral monopolies
repeatedly bargain with each other
– But competition may give information about nature of
product
2. Information
Needed so that purchasers can make good
choices
3. Low transactions costs (costs
associated with supply in a market)
Costs higher the greater uncertainty and the more
complete the contract
– contract likely to reflect uncertainty
– need to compare transactions costs with costs of
delivery in a single hierarchy
4. Motivation
• Providers motivated by financial incentives
• Purchasers need to be responsive to consumers
- competition between public suppliers will not
necessarily achieve the first, depends on
regulatory structures
- competition between suppliers will not necessarily
achieve the second (need regulation or
competition on the purchaser side as well)
5. Selection of good risks (equity
issue)
Leads to differential treatment of good and bad risks
(cream-skimming and patient dumping)
- competition may be associated with this, depends on the
pricing structure
To what extent are these criteria
met?
• Limited competition in health, education, more in
social services
• Information increasing
• Transactions costs appear to be initially high
• Motivation of providers and purchaser heavily
affected by regulatory regime
• Selection - in education
Efficiency
Condition
MARKET
Health Care
DHA
Bilateral
monopoly
Many
Purchasers
Many Providers
MOTIVATION
OF PROVIDER
MOTIVATION
OF
PURCHASER
Purchaser
dependent on
provider
Surplus
maximisation
(deficit
minimisation)
User welfare
maximisation
Education
Monopsony
purchaser
Many
Purchasers
SemiCompetitive
Providers
Many Providers
Purchaser
largely
dependent on
provider
Purchaser
partly
dependent on
provider
GPFH
STRUCTURE
INFORMATIO
N
Community
Care
Purchaser
independent of
Provider
As for DHA
Surplus
maximisation
Private: profitmax
Voluntary:
welfare-max,
subject to
breakeven
constraint
User welfare
maximisation
Surplus
maximisation
Parent welfare
maximisation