468. Markets and government

It is difficult to find an industry where markets are completely free, without regulation or intervention. The very notion of ‘free’ is problematic. Institutions are required not only to correct but also to enable markets.

In the most general terms, conditions for markets are conditions for the freedom of choice for users and freedom of enterprise for producers. To the extent that these freedoms are constrained, which is always the case to a greater or lesser extent, markets function only to some extent.

A question then is when we reach a point that regulation dominates freedom to such an extent that we can hardly still speak of markets. The question then becomes when regulations to channel and restrict the operation of a market go so far that it might be more efficient to take the alternative approach of public planning, which of course requires its own correction mechanisms. The question is not regulation or not, but how much regulation is needed.

Between ‘pure’ market, if that notion makes sense, and ‘pure’ public administration there is a range of forms with more or less public participation and regulation.

John Groenewegen identified several categories of public-private hybrids. In the first category the state owns and manages the assets, though it can by contract allocate the decision rights to a public agency or corporatized public entity. We may find that in the infrastructure of network industries, such as, for example railways, energy, water supply. Since there are no competing producers one can hardly speak of a market. However, the government can impose benchmarks that show the best performance achieved to challenge producers, or use them to set ceilings to costs. Sometimes the mere threat of privatization may stimulate efficiency. Also, producers may hive off part of their activities to markets, by outsourcing activities other than their core activities to commercial suppliers.

In the second category, Public-Private-Partnerships (PPPs), there are different distributions of ownership and decision rights. Private parties take risks in the supply of capital and responsibility for operating them. In return, they claim rights in the commercial supply of the service, a right to operate, and the right to design, build and operate the asset. Government maintains property and decision rights to the extent needed to guarantee a minimum level and quality of service. In some PPPs ownership is public and ‘peripheral parts’ are privately owned, and in others the building and maintenance of assets is private but the government is responsible for its design. Here, there is the possibility of concessions sold to private operators for a limited period, after which the rights are returned into public hands. Here we can think of the concession of rail and bus services.

The third category is regulated industries, where sector-specific regulators can by law intervene in the structure of the market or directly in the behaviour of the private actors. Here we find the telecom market, for example, where the government can intervene in tariff structures, for example. In case of a natural monopoly, where cost considerations, such as avoidance of any duplication of investments, such as with railway tracks or water or gas ducts, dictate a monopoly, there may be regulation concerning access to the infrastructure, quality, and price caps.  We find this, for example, in energy pipelines.