Markets, Efficiency, and Governance

This chapter provides an overview of markets and the conditions under which they fail to allocate society's resources efficiently from the perspective of neo-classical economic theory. The sources of market failures discussed are public goods, externalities, poorly defined property rights, high transaction costs, and information asymmetries. In addition to offering standard positive explanations for government intervention in failed markets, the chapter also presents a normative argument for doing so. Market theory is then linked to contemporary public administration through a discussion of alternative strategies for deciding the mode and extent of intervention. Finally, economic efficiency is extended to public management by arguing that managerial decision making is appropriately measured by technical efficiency, or a manager's ability to maximize program outputs given her resources.