Government Supply and Government Production Failure: A Framework Based on Contestability

ABSTRACT A complete conceptual framework for policy analysis requires a theory of government supply and government production failure to complement the well-developed theory of market failure provided by welfare economics. Charles Wolf has made an important start by attempting to draw parallels between market failures and the manifestations of government supply failures. This article provides a more useful analytical framework for government supply failure in two important ways. First, it draws on several perspectives from the economics of organization to sketch both normative and positive theories of government supply. Second, it uses the positive theory of government supply behavior to make direct comparisons with the traditional market failures. It concludes with some implications of the framework for assessing the potential gains from privatization.