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Market Mechanisms in Public Service Provision

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Practice Advice on Service Delivery and e-Government

Market Mechanisms in Public Service Provision (OECD)

Summary Advice: The OECD suggests that market mechanisms such as tendering, outsourcing, user choice and competition, user fees and output-related funding can be harnessed when providing public services.

Main Points: Market mechanisms can increase efficiency of public service delivery. The following policy options are suggested for both central and sub-central governments:

  • Contracting out: by relying more on open tenders, governments are likely to obtain public service delivery at lower cost. In order to avoid fragmented markets detrimental to efficiency, tendering rules should be harmonised across jurisdictions and government levels and central or sub-central governments may set up specialised agencies to deal with contracting out.
  • Granting user choice: user choice is likely to increase responsiveness of service providers. Mechanisms whereby money follows the user (“vouchers”) can strengthen this effect. To be viable across jurisdictions, user choice and voucher systems must be introduced together with horizontal financial agreements or central government compensation.
  • Relying more strongly on user fees: user fees may accommodate excessive demand as well as raise revenue in order to increase public service quality. User fees should be closely related to public service cost, in order not to become a form of hidden taxation.
  • Promoting equal access: increasing the use of market mechanism can -- but need not -- have undesirable distributional effects, both in social or geographical terms. Both central and sub-central government may have to introduce explicit minimum standards regarding service coverage, introduce means-tested income support or grant subsidies to service providers. Governments may also have to ensure that providers are not allowed to turn users away.
  • Maintaining sub-central autonomy: centrally-established rules may have to ensure efficient implementation of market mechanisms. To reduce the trade-off between central regulation and sub-central service accountability, central government may enact framework legislation, leaving more flexibility to SCGs. Also fiscal equalisation can help SCGs reach national standards but does not compel them to do so.

Source: OECD (2008). Blöchliger, Hansjörg, "Market Mechanisms in Public Service Provision”, OECD Economics Department Working Papers, No. 626, OECD Publishing at (accessed 22 February 2013).

Page Created By: Matthew Seddon. The content presented on this page is drawn directly from the source(s) cited above, and consists of direct quotations or close paraphrases. This material does not necessarily reflect the official view of the publishing organization.

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