Probably no one dare deny that efficiency or, efficient resource allocation, is one of the most vital public values for policy-makers. Policies, however, are seldom efficient. ‘Government failures’ abound. Inefficiencies in public policies are classified broadly into two groups: those whose faults fall on the supply-side, and those which are imperfect on the demand-side. This essay examines each of these groups in turn.
Type 1 is X-inefficiency, which has its roots in the discrepancy between the attainable minimal marginal production cost and the supplier-perceived cost. Because government agencies are (1)monopolist, (2)free from bankruptcy, (3)with the disjunction between costs and revenues, (4)with difficulty in measuring output, X-inefficiency in the public sector is likely to become worse and more prolonged than that in the private sector. In addition to the internal and semi-internal efforts for the better management and better monitoring systems, a couple of radical measures for a small government (privatization, de-regulation, de-centralization) are indispensable.
Type 2 inefficiencies are likely to result when decision-makers or government agencies fail adequately to perceive costs (the sum of implementation costs and losses incurred by a given population) or benefits of a policy for society as a whole. To correct this type of inefficiency, (1)more participatory democracy, (2)more public spirits for leading political actors, (3)more active public-interest groups and political entrepreneurs, (4)easier access to government information, (5)a set of strategies to deal with risks and uncertainties, are badly in need.
Type 3 inefficiencies derive from the de-coupling between burdens and benefits. The policy demand is very often inflated when free-rides are easy. ‘More partisan mutual adjustment’ is of course an effective measure, but never panacea. Institutionalizing the balanced budget principle, which forbids the present generation from enjoying undue policy benefits at the sacrifice of future generations, is also strongly recommended.
When policy consumers lack enough information about policy benefits, or they are too self-centered with little concern for the welfare of other people, future generations, animals, inanimate beings like historical buildings, their policy demand tends to be lower than the socially optimal level. Thus result Type 3 inefficiencies. To be stressed in this respect is the need for policy designers to consciously pursue the possibility of preference launderings as an integral part of policy goals.
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