¹ Wolf, Charles Jr, ‘A Theory of Nonmarket Failure’, Journal of Law and Economics, 22 (1979), 107–39.CrossRefGoogle Scholar

² Wolf, Charles Jr, Markets or Governments: Choosing Between Imperfect Alternatives (Cambridge, Mass.: MIT Press, 1988).Google Scholar

³ Mueller, D. C., Public Choice II (Cambridge: Cambridge University Press, 1989)Google Scholar; McLean, I., Public Choice: An Introduction (Oxford: Basil Blackwell, 1987).Google Scholar

⁴ As indicated in the previous footnote, such reviews exist elsewhere. The most comprehensive, and one which has greatly facilitated the writing of this article, is Mueller, , Public Choice II.Google Scholar However, this is quite technical in places. McLean, , Public ChoiceGoogle Scholar, is a good non-technical introduction to the literature. Also useful is Bosanquet, N., After the New Right (London: Heinemann, 1983)CrossRefGoogle Scholar, particularly for the discussions of authors ignored by the other two, such as Hayek and Milton Friedman.

⁵ For a fuller exposition of the theory of market failure and its application that is accessible to non-specialists, see Le Grand, J., Propper, C. and Robinson, R., The Economics of Social Problems, 3rd edn (London: Macmillan, 1991).Google Scholar For those with a little more economics training, another useful text is Barr, N., The Economics of the Welfare State (London: Weidenfeld and Nicolson, 1987).Google Scholar

⁶ There are of course other social objectives or values against which market performance can be judged, such as the preservation of liberty or the promotion of a sense of community. Welfare economics textbooks usually give these even less attention than equity; a limited exception is LeGrand, Propper and Robinson, The Economics of Social Problems. An important recent discussion of the ability of markets to attain a broader set of social objectives can be found in Miller, D., Markets, State and Community (Oxford: Oxford University Press, 1989).Google Scholar See also some of the contributions to Le Grand, J. and Estrin, S., eds, Market Socialism (Oxford: Oxford University Press, 1989)Google Scholar, particularly those by Millerand R. Plant.

⁷ Strictly, this second definition of allocative efficiency is equivalent to ‘potential’ Pareto efficiency whereby an allocation of resources is efficient if it is impossible for the gainers from any change potentially to compensate the losers and still remain better off. For further discussions of different definitions of economic efficiency (including Pareto-efficiency) and of the values they imply, see Le Grand, J., ‘Equity vs Efficiency: The Elusive Trade-off’, Ethics, 100 (1990), 554–68CrossRefGoogle Scholar, reproduced as chap. 3 in Le Grand, J., Equity and Choice (London: Harper Collins, 1991).Google Scholar

⁸ Although these are the sources of market failure that are currently receiving most attention in the welfare economics literature, there are others that have attracted attention in the past and are still of considerable practical relevance. For example, one that will be familiar to anyone who has encountered elementary economics texts is the ‘corn’ or ‘hog’ cycle: the tendency of markets with long production times, such as those for agricultural commodities, to be unstable, with continuous under- and over-shooting of the efficient level of production.

⁹ If insurance companies had sufficient information concerning the patient's condition, they could control the moral hazard problem by determining the efficient level of treatment beforehand and only re-imbursing up to that level. However, they have difficulty doing this precisely because of the information difficulties associated with medical care.

¹⁰ There are some notable exceptions, reviewed in Le Grand, , Equity and Choice.Google Scholar

¹¹ Wolf, , Markets or Governments, pp. 63–4.Google Scholar

¹² For information concerning charges in Britain and a discussion of their role, see Rose, R., ‘Charges as Contested Signals’, Journal of Public Policy, 9 (1989), 261–86.CrossRefGoogle Scholar

¹³ Wolf, , Markets or Governments, p. 66.Google Scholar

¹⁴ Niskanen, W. A. Jr, Bureaucracy and Representative Government (Chicago: Aldine Atherton, 1971).Google Scholar

¹⁵ Wolf, , Markets and Governments, p. 67.Google Scholar

¹⁶ Wolf, , Markets and Governments, p. 77.Google Scholar

¹⁷ These changes and their implications for the efficiency and equity of government policy on the area concerned are examined in Le Grand, J., Quasi-Markets in Social Policy: Studies in Decentralisation and Quasi-Markets No. I (Bristol: University of Bristol, School for Advanced Urban Studies, 1990).Google Scholar

¹⁸ Borcherding, T. E., Pommerehne, W. W. and Schneider, F., Comparing the Efficiency of Private and Public Production: The Evidence from Five Countries (Zurich: University of Zurich Institute for Empirical Research in Economics, 1982).Google Scholar

¹⁹ Millward, R., ‘The Comparative Performance of Public and Private Ownership’, in Roll, E., ed., The Mixed Economy (London: Macmillan, 1982).Google Scholar

²⁰ Vickers, John and Yarrow, George, Privatization: An Economic Analysis (Cambridge, Mass.: MIT Press, 1988), pp. 39–43.Google Scholar

²¹ Barr, N., Glennerster, H. and Le Grand, J., Reform and the National Health Service, STICERD Welfare State Programme Discussion Paper No. 32 (London: London School of Economics, 1988).Google Scholar

²² The theory of the budget-maximizing bureaucrat was developed by Niskanen, in Bureaucracy and Representative Government.Google Scholar Its theoretical basis has been challenged by a number of authors: see, for example, Dunleavy, P., ‘Bureaucrats, Budgets and the Growth of the State’, British Journal of Political Science, 15 (1985), 299–328CrossRefGoogle Scholar; Goodin, R., ‘Rational Politicians and Rational Bureaucrats in Washington and Whitehall’, Public Administration, 60 (1982), 23–41CrossRefGoogle Scholar; Cullis, J. G. and Jones, P. R., Micro-Economics and the Public Economy: A Defence of Leviathan (Oxford: Basil Blackwell, 1987).Google Scholar

²³ Hayek was perhaps the first to draw attention to the importance of prices and information: see, for example, Hayek, F. A. ‘The Use of Knowledge in Society’, American Economic Review, 35 (1945), 519–30.Google Scholar It should be remembered that at times prices convey the wrong information. Many of the instances of market failure – especially those concerned with externalities and imperfect information – arise because of the failure of prices to provide appropriate information.

²⁴ The median voter theorem has its origins in Hotelling, Harold's ‘Stability in Competition’, Economic Journal, 39 (1929), 41–57.CrossRefGoogle Scholar Since then, of course, it has been extensively developed, as well as subject to empirical tests; a useful review of the relevant literature can be found in Mueller, Public Choice II.

²⁵ The possibility that majority rule can lead to cycles in this way was first discussed (in recent times) by Black, Duncan in ‘The Decisions of a Committee Using a Special Majority’, Econometrica, 16 (1948), 245–61.CrossRefGoogle Scholar It also forms an important part of Arrow, Kenneth's ‘Impossibility Theorem’ in his Social Choice and Individual Values (New York: John Wiley and Sons, 1951; revised edition, 1963).Google Scholar

²⁶ See, for example, Buchanan, J. M. and Tullock, G., The Calculus of Consent (Ann Arbor, Michigan: University of Michigan Press, 1962).CrossRefGoogle Scholar

²⁷ See Downs, A., ‘Why the Government Budget Is Too Small in a Democracy’, World Politics, 12 (1960), 541–63.CrossRefGoogle Scholar

²⁸ See, for example: Peltzman, S., ‘The Growth of Government’, Journal of Law and Economics, 23 (1980), 209–87CrossRefGoogle Scholar, reprinted as chap. 1 of Stigler, G. J., ed., Chicago Studies in Political Economy (Chicago: University of Chicago Press, 1988)Google Scholar; Le Grand, J. and Winter, D., ‘The Middle Classes and the Defence of the British Welfare State’Google Scholar, chap. 8 in Goodin, R., Le Grand, J. et al. , Not Only the Poor: The Middle Classes and the Welfare State (London: Allen & Unwin, 1987)Google Scholar; Pampel, F. C. and Williamson, J. B., Age, Class, Politics and the Welfare State (Cambridge: Cambridge University Press, 1989)CrossRefGoogle Scholar; Le Grand, J., ‘The State of Welfare’Google Scholar, chap. 10 in Hills, J., ed., The State of Welfare (Oxford: Oxford University Press, 1990).Google Scholar Peltzman and Pampel and Williamson provide useful references to some of the rest of the literature, as does Mueller, , Public Choice IIGoogle Scholar, chap. 17.

²⁹ I am grateful to Anthony King for this point.

³⁰ Again a useful review can be found in Mueller, , Public Choice IIGoogle Scholar, especially chap. 13. Aspects of the economic theory of regulation are discussed in Vickers, and Yarrow, , PrivatizationGoogle Scholar, chap. 4, and in Part 2 of Stigler, , ed., Chicago Studies in Political Economy.Google Scholar

³¹ See Mueller, , Public Choice IIGoogle Scholar, chap. 13, Part B, and the references therein; Stigler, , ed., Chicago Studies in Political EconomyGoogle Scholar, Part 3; Vickers, and Yarrow, , Privatization, Part II.Google Scholar

³² See Deacon, A. and Bradshaw, J., Reserved for the Poor: The Means Test in British Social Policy (Oxford: Basil Blackwell and Martin Robertson, 1983).Google Scholar

³³ Yet another potential problem concerns means-test ‘creep’ over time, whereby means-tested services are metamorphosed into universal ones. See Goodin, R. and Le Grand, J., ‘Creeping Universalism in the Welfare State: Some Evidence from Australia’, Journal of Public Policy, 6 (1986), 255–74CrossRefGoogle Scholar, reprinted as chap. 6 in Goodin, , Le Grand, et al. , Not Only the Poor.Google Scholar

³⁴ See Stigler, G. J., ‘Director's Law of Public Income Redistribution’, Journal of Law and Economics, 13 (1970), 1–10CrossRefGoogle Scholar, reprinted in Stigler, , ed., Chicago Studies in Political EconomyGoogle Scholar; Le Grand, J., The Strategy of Equality (London: Allen and Unwin, 1982)Google Scholar; Goodin, , Le Grand, et al. , Not Only the PoorGoogle Scholar; Bramley, G., Le Grand, J. and Low, W., ‘How Far is the Poll Tax a Community Charge? The Implications of Service Usage Evidence’, Policy and Politics, 17 (1989), 187–205.CrossRefGoogle Scholar See also George, V. and Wilding, P., The Impact of Social Policy (London: Routledge and Kegan Paul, 1984)Google Scholar; Ringen, S., The Possibility of Politics (Oxford: Oxford University Press, 1987)Google Scholar; Pampel, and Williamson, , Age, Class, Politics and the Welfare State.Google Scholar

³⁵ See Le Grand, J., ‘Measuring the Distributional Impact of the Welfare State: Methodological Issues’Google Scholar, chap. 2 in Goodin, , Le Grand, et al. , Not Only the Poor.Google Scholar