Public Value Failure: “When Efficient Markets May Not Do”

The familiar market failure model remains quite useful for issues of price efficiency and traditional utilitarianism, but has many shortcomings as an aid to understanding the public value aspects of public policy and management. In developing a public value failure model, I present diagnostic criteria for values problems not easily addressed by market failure models. Public value failure occurs when: (1) mechanisms for values articulation and aggregation have broken down; (2) “imperfect monopolies” occur; (3) benefit hoarding occurs (i.e. public domain benefits and public goods have been captured by groups, limiting distribution to the population); (4) there is a scarcity of providers of public value; (5) a short time horizon threatens public value; (6) there is a focus on substitutability of assets that threatens conservation of public resources; (7) social and market transactions threaten fundamental human subsistence. After providing examples of public failure diagnostics, including an extended example concerning the market for human organs, I introduce a “public failure grid” to help interpret policy issues according to public failure criteria. The basic point of the grid is a simple one: market failure-success and public failure-success are independent dimensions and, thus, market failure criteria are rarely sufficient for public policy decision-making. Considering the joint criteria holds promise of improved policy outcomes by addressing both economic efficiency and public value.