Step 1: What's the market failure?
When should the State intervene? The technically sound answer is: When you are certain there is a market failure, and when you are confident you know how to setup the correct State capacity for the intervention.
Market failures come in four kinds: 1. Asymmetric information, 2.externalities, 3. market power and 4. public goods. These are technical terms in microeconomics and each needs to be carefully understood.
The first hurdle that must be crossed in policy thinking is: "Is there a market failure?" Every proposal to do something in public policy faces this test.
Step 2: What's the proposed intervention?
Once we agree there is a market failure, we have to figure out what we'd like to do about it. Here, it's important to understand the anatomy of the market failure, and solve it at its root cause.
If there is a causal chain x -> y -> z, and there is a problem with the outcome z, don't use the power of the State to change y or z. Understand the root cause, and solve it there.…
Step 3: The hurdle of public administration
Okay, you are all dressed up and ready to go, with a demonstrated market failure, and a minimal intervention which solves it. Now the question arises: Can you design a feasible solution with real world public administration?
Ajay Shah
Become a public policy thinker in three easy steps
Become a public policy thinker in three easy steps
Ajay Shah | Co-Lead of the NIPFP-DEA Research Program, India
