A Theory of “Non-Market Failure”

Framework for Implementation Analysis

by Charles Wolf, Jr.

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The principal rationale for public policy intervention lies in the inadequacies of market outcomes. A reasonably well-structured theory already exists for explaining and predicting these inadequacies or failures. But nonmarket remedies for market failures may themselves fail. The predictability of nonmarket failure can be advanced by a general framework for analyzing the sources of nonmarket failure. The theory of nonmarket failure developed in this paper suggests what these sources of failure are and where to look for them. There are four sources and types of nonmarket failure (NMF): “internalities”; redundant and rising costs; derived externalities; and distributional inequity. For a more accurate assessment of alternative public policies, as well as between them and market outcomes, policy analysis needs to give explicit attention to how particular policy alternatives will be implemented. The theory of nonmarket failure provides a framework for the systematic analysis of implementation prospects as an integral part of policy research.

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